Matthews™ Spring/Summer 2017 Publication by Matthews Real Estate Investment Services

SPRING 2017

Certainty of Execution When an opportunity arises, you need the right partnership to experience real results. Customized capital placement solutions. Rooted capital sources. Secure financing. Our trusted advisors provide innovative financial plans with the most aggressive terms across all asset classes. Maintain control over your ventures and experience Barringtonâ&#x20AC;&#x2122;s power of certainty.

469%

378%

YOY FINANCING VOLUME GROWTH

YOY TRANSACTION GROWTH

97% FUNDING RATE

Ref inancing | Acquisition Financing | Equity Placement W W W . B A R R I N G T O N C A P C O R P. C O M

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M AT T H E W S T M M AY 2 0 1 7 | 1

20 06

2017: THE PEAK O F M U LT I F A M I L Y DEVELOPMENT

MARKET TRENDS

A M A Z O N A N D T H E A U T O PA R T S I N D U S T R Y

EMPIRE ON THE RISE: INDUSTRIAL

S T AT E O F FINANCING

T A B L E

O F

100

A U T O PA R T S V S . AUTO SERVICES

STNL: BY THE NUMBERS AUTO PARTS

AUTO

104

REGIONS OF RETAIL

THE MEDICAL REAL ESTATE MARKET

154

MILLENIALS: 5 BIG CHANGES LEADERS NEED TO MAKE

C O N T E N T S

LETTER

FROM

THE

CEO

HAS THE MUSIC STOPPED PLAYING? That is the question everyone seems to be asking us. Commercial real estate investors have begun to recognize that we have been in a market with steady value growth since 2010. In addition to being in year seven of a historically 5-7 year industry cycle, overall US transaction volume fell -9.6% in 2016 as compared to 2015, and Q1 2017 velocity declined -18% as compared to the year prior. Typically this would symbolize the beginning of declining values. But Matthews REIS™’s activity and results tell us the story is not that simple. Yes, the values of properties with certain characteristics have already started to head south. If you own property in smaller markets, generally, you might have already experienced softening throughout 2016 and into 2017, even considering interest rates remained relatively unchanged. In some of the more “core” markets or top 10 to 15 MSAs, if your property has not been updated with amenities that create the ultimate customer or tenant experience, you might have noticed rising vacancies, lack of rent growth, or both. If you are an owner of these types of properties, expect to work hard over the next coming years to maintain the current market value you expect to achieve if you were to sell. But even with the changing winds in certain areas of commercial real estate, the music continues to play for a large contingent of owners who own great assets in growing markets. Best in class properties are still commanding record breaking prices and rents. Clearly, some asset classes are the darling of public opinion (think industrial) and some are persona non-grata (think retail). But active commercial real estate investors and professionals are still finding opportunities across all product types every day to create value through opportunistic buying and selling combined with aggressive asset and property management strategies. We are actively involved in transactions where the seller is often selling at a record-breaking price or cap rate achieved through a comprehensive national marketing campaign. We are also witnessing buyers across every single investment class making strategic purchases that have created value through a repositioning of the asset. So don’t listen to the story some “pundits” are selling, that the market has changed and it’s all bad news. It’s not even close to that in fact. While we will all have to work a little harder and smarter to continue the success that has been achieved over the past seven years, through tenacity combined with a sound business plan, you will continue to experience positive results. Look no further than to Matthews REIS™. While, as stated earlier, overall US transaction velocity was down in 2016 -9.6%, we were up +51.7% YOY from 2015. While national data has shown a -18% dip in velocity YOY in Q1 2017, we are up 123% YOY from Q1 2016. Our results prove that we can all still be in control of our experience at this point. Maybe the music has stopped playing for some of the other folks in commercial real estate, but if you do have a plan and you are committed to seeing it through, then just put on your headphones, pick the song that goes with your vision, and turn up the volume!

KY L E MA T T H EW S C H A I R M A N A N D CEO

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CONTRIBUTORS KYLE MATTHEWS

CHARI MAN & CEO

RADOSLAV ZLATKOV

CHI EF F I NAN CI A L OPERAT I N G OFFI CER

DAVID HARRINGTON

EVP & NATI ONA L D I RECTOR, M U LT I FA M I LY

EL WARNER

EVP & NATI ONA L D I RECTOR, S H OPPI NG CEN T ERS

CHAD KURZ

SVP & NATI ONA L D I RECTOR, ST N L

ARON CLINE

SVP & SENI OR D I RECTOR, ST N L

SCOTT HENARD

SVP & REGI ONA L D I RECTOR, S H OPPI NG CEN T ERS

TIM WOODS

NATI ONAL DI RECTOR, A SS ET S ERVI CES

MIKE PAKRAVAN

SVP & NATI ONA L D I RECTOR, RETA I L LEA S I NG

CALVIN SHORT

F VP & SENI OR D I RECTOR, ST NL

GARY CHOU

F VP & SENI OR D I RECTOR, ST NL

JORDAN UTTAL

VP & DI RECTOR, ST N L

JOSH BISHOP

VP & DI RECTOR, ST N L

BRADEN CROCKETT

AVP & DI REC TOR, ST NL

EDI TORI AL & DESI G N CAT RAY HANA COOKSON ALFONSO LOMELI ERICA RAGLAND MARINA RUBIO

CONT RI BU TORS ADAM RAIZE

CHUCK EVANS

JORDAN POWELL JOSEPH NELSON

ANDREW PEASH

CONNOR OLANDT

ALEXANDER HARROLD

CONRAD SARREAL

KEVIN CHANG

ANDREW GROSS

CRAIG IRVIN

LINDSAY TSUMPES

ANDREW IVANKOVICH

DALTON BARNES

MATT COATES

AARON GUIDO

DANNY MCQUAID

MAXX BAUMAN

AUSTIN FISHER

DAVID XIAO

MICHAEL ASTORIAN

BILL PEDERSEN

DEVON DYKSTRA

MICHAEL CHISLOCK

BRIAN KREBS

GORDON MILLER

MICHAEL MORENO

BRIANNA BURGESS

GREG AMATO

MINNIE ALLISON

BRUCE EVERSOLE

JAKE SEIJAS

NICK DELL

BRYANT HOOVER

JEFFERY MILLER

RAHUL CHHAJED

CAITLIN ZIRPOLO

JOHNNY BLUE CRAIG

SAM SILVERMAN

CHRIS LASKERO

JONATHAN PRATER

WESLEY CONNOLLY

JORDAN GOMEZ

SPECIAL THANKS TO

BARRINGTON CAPITAL CORPORATION

CONNECT MEDIA

CREXi

MatthewsTM REIS Disclaimer 2017 This publication has been produced by Matthews Retail Group, Inc. solely for information purposes and the information contained has been obtained from public sources believed to be reliable. While we do not doubt their accuracy, we have not verified such information. No guarantee, warranty or representation, expressed or implied, is made as to the accuracy or completeness of any of the information contained and Matthews REISTM shall not be liable to any reader or third party in any way. This publication is not intended to be a complete description of the markets or developments to which it refers. All rights to the material are reserved and cannot be reproduced without prior written consent of Matthews REISTM. M AT T H E W S T M M AY 2 0 1 7 | 5

MARKET

TRENDS

BUYER COMPOSITION JAN 2016 - DEC 2016

INSTITUTIONAL/FUND LISTED/ REITS PRIVATE CROSS-BORDER USER/OTHER

MULTI TENANT

SINGLE TENANT

S O UR C E: R CA

US GDP GROWTH RATE -1.2%

2014 Q1

2014 Q2

IN THE PAST 11 YEARS ALONE, ASSET MANAGERSâ&#x20AC;&#x2122; ASSETS UNDER MANAGEMENT GLOBALLY HAVE MORE THAN DOUBLED FROM $37.3 TRILLION IN 2004 TO $78.7 TRILLION IN 2015.

SOU RCE: PWC

2014 Q3

2014 Q4

2.3%

2015 Q1

2015 Q2

2.6%

2015 Q3

2015 Q4

0.9%

2016 Q1

0.8

2016 Q2

1.4%

2016 Q3 2016 Q4

3.5% 2.1%

S O UR C E: T R A DI N G ECON OM ICS

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MARKET

TRENDS

Q1 2017

YO Y V O L U M E C H A N G E

35% - 1 8% - 35 % + 3 % + 10 % U. S . OVE R A L L

M U LT I FA M I LY

I N D U ST R I A L

R E TA I L

S O U RCE: RCA

Q1 2016

LEGEND

Q2 2016

Q3 2 01 6

UN E M PLOY M E N T RATE C USTOM E R PR I C E IND EX

Q4 2 01 6

UR CP I

Q1 2 01 7

SOUR CE: US BUR EAU OF LABOR STATIST ICS

What could you read in 30 seconds or less?

M AT T H E W S T M M AY 2 0 1 7 | 7

MARKET

TRENDS

TOP CITIES TO INVEST IN 2017

LOS ANGELES ORANGE COUNTY PORTLAND

AUSTIN

SAN FRANCISCO

CHARLOTTE

SEATTLE

DALLAS/FORT WORTH NASHVILLE RALEIGH/DURHAM

S O UR CE: PWC

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MARKET

TO P 5 M A R K E TS

UNDER CONSTRUCTION

TRENDS

DALLAS

TOTAL GLA 5,677,914 NUMBER OF BUILDINGS 206

NORTHERN NEW JERSEY

TOTAL GLA 3,779,597 NUMBER OF BUILDINGS 64

ATLANTA

TOTAL GLA 3,465,547 NUMBER OF BUILDINGS 106

LONG ISLAND (NEW YORK)

TOTAL GLA 3,187,281 NUMBER OF BUILDINGS 74

PHILADELPHIA

TOTAL GLA 3,058,295 NUMBER OF BUILDINGS 102 S O UR C E: C O STAR

Everything that matters.

Shareholders OK $6.4B Western Refining Sale Have you registered for Connect Austin yet? Click here for more information! Shareholders with Tempe, AZ’s Western Refining and Tesoro Corp. of San Antonio voted in favor of the former company’s acquisition by the latter. The $6.4 billion deal remains subject to approval by federal regulators, and is expected to close in the first half of 2017. The merger had been the target of several lawsuits from concerned shareholders, claiming that Western Refining had filed false or misleading information about the proposed merger. A federal judge in El Paso dismissed five shareholders’ separate lawsuits against both companies on March 20, ordering that the lawyers on both sides come to an agreement on fees that the shareholders are asking the companies to pay. The merger will bring Tesoro ownership in Western Refining Logistics, which operates pipelines in the Permian basin, as well as additional transportation and storage facilities. READ MORE AT EL PASO TIMES

www.connect.media

CRE NEWS • CONFERENCES • MARKETING SOLUTIONS

one click away AMAZON DISRUPTION HITS THE AUTO PARTS INDUSTRY BY CONRAD SARREAL, NATIONAL AUTO PARTS SPECIALIST The auto parts business, once predominantly brick-and-mortar retail, is undergoing a transformation. The catalyst, as with much of retail, is inroads by online providers, especially Amazon. Online sales of automotive parts in 2015 were double their volume in 2011, according to Hedges & Company, a market research company that focuses on the automotive aftermarket and motorsports industries. Online sales grew another 20.6 percent in 2016. Hedges projects online sales to grow by more than 15% per year over the next several years. At this pace, online auto parts sales are predicted to reach approximately $14 billion by 2020, nearly double 2016’s levels.

Online auto parts pricing undercuts brick and mortar E-commerce behemoth Amazon is the primary driver of online sales in auto parts. While overall online sales of auto parts are growing at an annual pace of 15-16 percent, Amazon’s ability to establish itself in new segments suggests that rate can increase. Pricing – and a growing consumer preference for online retail – is driving online sales growth. Amazon consistently undercuts the prices of AutoZone, O’Reilly Auto Parts, Advance Auto Parts and other major brick-and-mortar retailers, which allows them to capture more market share. For example, a radiator replacement part for 2010 Toyota Corolla can be found on Amazon for $99. The same radiator retails for $184, $178, and $150 at AutoZone, O’Reilly Auto Parts, and Advance Auto Parts, respectively.

Amazon is making deals with auto parts manufacturers In January, Amazon announced that it is signing contracts with the biggest auto parts manufacturers in the United States, including Robert Bosch, Federal-Mogul, Dorman Products and Cardone Industries. By securing contracts 1 0 | M AT T H E W S T M M AY 2 0 1 7

for parts at wholesale prices, Amazon can feed its nationwide network of distribution centers and deliver parts to consumers at significantly lower prices than their retail store competition. According to a story in the New York Post, Amazon is able to develop relationships with manufacturers because of growing rifts between auto parts retailers and their domestic suppliers. Retailers have been developing overseas manufacturing sources to lower their costs and provide higher margins. U.S. manufacturers are less than happy with that development – hence the opening for a relationship with Amazon. Of course, Amazon can also seek overseas manufacturing sources and as its volume in auto parts sales increases, that likelihood looms.

Auto Parts stores lack differentiation While Amazon is clearly a threat to brick-and-mortar auto parts retail, part of the problem is that there is little perceived differentiation among the stores. All the major chains purchase parts from a mix of the same manufacturers. While a store can claim better and more informed service, the consumer can see little difference between a comparably-featured spark plug from one store versus another. Lacking differentiation, a consumer might easily opt to purchase that spark plug online at a lower price.

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 1

How Auto Parts retailers are responding As noted, auto parts retailers are increasingly sourcing cheaper parts from overseas to provide more margin, or to simply provide room for price reductions brought on by online sales encroachment. Auto parts retailers are also restructuring their portfolios. The top three auto parts retailers – AutoZone, O’Reilly Auto Parts, Advance Auto Parts – have a combined total of more than 14,000 stores in the U.S., as of the end of fiscal 2016. The stores are upon average sized between 5,500 to 7,900 square feet. In recent years, AutoZone

has altered its real estate footprint by increasing the number of corporate-owned stores or preferring ground leases when the dirt can’t be purchased. O’Reilly Auto Parts has taken a similar strategy of corporate-owned stores for its West Coast properties, while preferred developments continue in the Southeast and Midwest regions. Meanwhile, Advance Auto Parts continues to use their preferred development program for most of their new stores. AutoZone’s and O’Reilly’s shift in development strategy suggests that reducing overhead costs such as leasing expenses is necessary to adapt of changing market conditions.

LLY

SALES COMPARISONS AAP AUTOZONE O’REILLY

$9.57B $10.6B $8.6B

SOURCES: ADVANCED AUTO PARTS, AUTOZONE, O’REILLY

In other areas of retail that have tried to fight Amazon and online sales, the progression eventually turned to store closings and consolidations. Auto parts retailers may opt for a similar strategy as online sales continues to grow at a rapid pace.

Auto Parts market share losses follow a pattern Auto parts retailers aren’t the first victims of Amazon’s undermining pricing strategy. Among others, Walmart and Macy’s have been battling the online giant for years. Boomerang Commerce, a start-up that helps online companies find optimal prices for merchandise, revealed that Amazon targets widely popular items supplied by competitors and offers them at a discount. For example, Boomerang cites a popular Internet router posted at a sale price of $144 at Walmart. The same

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router was posted on Amazon for $120. Similarly, Amazon is upending even periods of peak apparel and homewares retail sales, like the holidays. The Motley Fool reported that Macy’s and other major retailers resorted to deeper discounts and extended promotion dates around Black Friday to remain competitive with Amazon, who began offering dramatic discounts a week before the shopping holiday. While auto parts and apparel and home goods are in completely different product categories, the growing threat of e-commerce, and specifically Amazon, bears a resemblance. The correlation suggests that over the next 5 to 10 years AutoZone, O’Reilly Auto Parts, and Advance Auto Parts could be find themselves in a similar no-win situation. For more information, please contact: CONRAD SARREAL (310) 919-5760 CONRAD.SARREAL@MATTHEWS.COM

The auto parts retail sector is relatively healthy – for now Based on stock market prices, investors are betting that online auto parts sales are unlikely to surpass the market penetration of retailers who have dominated the segment for decades. At least, not in the immediate future. However, it is worth noting that Amazon’s performance in apparel is instructive. A Cowen & Co. study that tracks Amazon’s growth reported that Amazon had a 1.4 percent market share in the US retail clothing and accessories market in 2011.

$14,000 $13,000 $12,000 $11,000

”

E-commerce auto parts sales in the US grew 16% last year to reach $7.4 billion, with Amazon and eBay holding the top two spots in terms of online auto parts sales SOURCES: HEDGES & COMPANY

ONLINE SALES OF NEW AUTO PARTS & ACCESORIES

$10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000

SOURCE: HEDGES & COMPANY

The Cowen report forecasts that six years later, Amazon will be America’s top seller of apparel in 2017, overtaking Macy’s.

amazon accounted for the majority of e-commerce growth in 2016

amazon 53%

SOURCES: SLICE INTELLIGENCE

Through strategic partnerships, dynamic marketing strategies, and a well-developed distribution system, Amazon is projected to accomplish an astounding year-over-year sales growth of about 26 percent between 2011 and 2020. Fast forward to 2020, and Amazon is projected to triple its 2015 apparel market share, from 6 percent to almost 20 percent, and triple its 2016 apparel revenue in the process. The shakeout in the retail real estate business is dramatic. As Amazon has grown, iconic stores such as Macy’s adapt by cutting back, announcing a consolidation of stores that should save them $550 million annually, as reported by CNBC. Over a dozen other brand-name tenants are also announcing store closures, including Sears, Kmart, JCPenny, Payless Shoesource, Macy’s, Staples, Radioshack, and CVS.

M AT T H E W S T M M AY 2 0 1 7 | 1 3

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INDUSTRIAL v p

B Y j o r d a n u t t a l a n d d i r e c t o r , S T N L

Industrial Properties:

e-commerce is now a major factor For retail investors, e-commerce has grown to become a factor in any investment equation. Consumers have shown a preference for online purchases in a number of categories. Major retailers like Walmart, Home Depot, Target and others are committing more and more resources to their online presence. While brick-and-mortar continues to play a significant role in shopping, investors now look at a company’s capabilities in both online and physical stores, a sales process called “Omni Channel.”

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 5

INDUSTRIAL BENEFITS FROM E-COMMERCE GROWTH While retail presents a problematic relationship with e-commerce, there is a property type that directly benefits from the rise of digital transactions: Industrial. With retailers carrying less product in stock, more products are concentrated in warehouses and distribution centers, which has greatly increased the importance of Industrial properties and the corresponding Supply Chain Management and logistics. Given the greater concentration of activity, it’s no wonder that sales volume, rents, vacancy, and new development have all improved to near or new record highs in the Industrial asset sector.

MEGA WAREHOUSES ARE A INDUSTRIAL SECTOR

The proof is in the numbers: 120 Retail Mega Warehouses have been built since 2010, representing over 141 million SF of industrial property. With properties developed by Amazon and other companies, Mega Warehouses of over 1 million SF are now considered “Intermediate Facilities” for retailers. These properties are typically in locations just outside of the major population hubs, and their primary activity is fulfilling a retailer’s need to have goods shipped directly to consumers in a timely manner.

D R I V E R OF

GROWTH

The Mega Warehouse pipeline continues to grow. 29 buildings are in active development, adding a total of 31.5M SF. The ten U.S. locations experiencing the most development are: Philadelphia, including Southern New Jersey | California’s Inland Empire Dallas/Ft Worth metroplex | Atlanta metro area | Chicago | Memphis Columbus, Ohio | Cincinnati | Indianapolis | Phoenix

Many of these Mega Warehouses sole purpose is to support retail operations in urban and suburban centers, and are being developed by major brick-and-mortar retailers. 1 6 | M AT T H E W S T M M AY 2 0 1 7

INDUSTRIAL “INTERMEDIATE HUBS” ARE HOT A growing trend is retailer demand for an “Intermediate Hub,”not to be confused with an Intermediate Facility, a smaller warehouse space closer to the infill population, typically supplied by a Mega Warehouse in a more remote location. For example, a Mega Warehouse located in Inland Empire will supply Intermediate Hubs and direct-to-retailer store fronts in Los Angeles County.

Because of the affordability comparative to core markets, many retailers are choosing to set up their Intermediate Hubs just outside their core markets. Many potential tenants are implementing teams to analyze transportation pricing vs, the real estate pricing to determine where they should locate their next Industrial space; they are most often discovering that it is cheaper to move the real estate further out and pay the added transportation costs.

INVESTORS ARE MOVING INTO INDUSTRIAL IN A BIG WAY Savvy investors are seeing these trends and are jumping into the Industrial market, or are increasing their portfolios in the Industrial sector: •

2015 set record volume for Industrial property sales

•

2016 sales were the second largest tally since 2008

Interestingly, 2016 was largely driven by single-asset transactions -70 percent- as opposed to the typical portfolio purchase. 38 percent of 2016 transactions were below $20M in value, as opposed to 27 percent in 2015. This shows the demand for one-off product is now selling to a different investor pool.

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INDUSTRIAL CAP RATES ARE COMPRESSED NATIONWIDE Industrial cap rates have compressed across the country. A-markets like Southern California, The Bay Area, Seattle, NJ / NY, and Miami all have cap rates ranging from 4 to 5 percent for their A-product. The highest cap rates are in second- and thirdtier markets: Nashville, St Louis, Memphis, Minnesota, Kansas City, and Tampa /Orlando. Cap rates in these markets range from 6 to 7 percent. These groundbreaking figures only further demonstrate the rise of the industrial sector.

VACANCY RATES ARE NEAR RECORD LOWS – AND RENTS NEAR RECORD HIGHS The impact of all this Industrial property activity is dramatic: U.S. Industrial vacancy set a record low in 2016, with a national average of 5.6 percent. Class-A space in major urban markets (especially port markets) have seen extreme rent and property value growth, which has pushed demand into secondary and tertiary markets. 2016 national average rent growth was 8.7 percent. In some primary markets, rents are skyrocketing: • SF/Mid-Peninsula & East Bay/Oakland each saw rent growth of over 20 percent in Q4 2016 • Norther Jersey & Atlanta rents grew saw 6 to 8 percent in 2016 • Dallas, Philadelphia, Chicago saw rent growth of 2 to 4 percent Rent increases are occurring in Secondary Markets as well: • Portland saw the largest rent growth: 18 percent • Rent growth in Palm Beach, Seattle, Orange County CA, San Diego, Washington D.C., and St. Louis ranged from 8 to 12 percent In Tertiary Markets like Richmond, Nashville, Salt Lake City, and Detroit, rents grew 6 to 11 percent in 2016.

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INDUSTRIAL WILL CONTINUE TO BE STRONG IN 2017 AND BEYOND E-commerce is helping to transform the Industrial market, driving up rents and pricing while vacancy continue to decline, even with significant new levels of development. E-commerce is also boosting Industrialâ&#x20AC;&#x2122;s revenues and developments directly. Amazon has expanded its footprint in the Inland Empire. Based on projections that e-commerce sales will grow at a rate of 14.6 percent annually, the sectorâ&#x20AC;&#x2122;s share of all U.S. retail sales will increase from its current 7.3 percent share. As it does, Industrial will play an even more significant role for investors. In this market environment, a shift in buyer mentality is driving down industrial cap rates. Many investors now think that a retail distribution center is a better real estate play than the actual retail storefront. One can only imagine the runway of growth moving forward. For more information on Industrial and retail properties, please contact: JORDAN UTTAL (310) 919-5707 JORDAN.UTTAL@MATTHEWS.COM

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20 1 7

THE PEAK OF

M U LT I FA M I LY DEVELOPMENT BY DAV I D H A R R I N G T O N E V P & NAT I O NA L D I R E C T O R

ew apartment deliveries are peaking and the first half of 2017 has seen a nearly 50% increase in deliveries over the same time last year. Almost every major metro across the country will see increases in apartment deliveries in 2017 with the New York and Dallas metros leading the way. The Dallas-Fort Worth (DFW) metro area is expecting a whopping 73% increase of new apartment units coming online over what was seen in 2016. When looking specifically at the Fort Worth submarket, we saw 1,872 units delivered in 2016 and there are currently 4,859 units being tracked for delivery this year. This represents a 160% increase in new units coming to the market in 2017. Multifamily permitting ramped up through 2015 and 2016 and has indeed led to swollen delivery numbers this year. Construction delays due to financing constraints, bad 2 0 | M AT T H E W S T M M AY 2 0 1 7

weather, and challenges with city planning departments may also be to blame. These delays have pushed off many of the 2016 scheduled deliveries to bleed into 2017, further inflating the numbers. However, the permitting statistics and delivery projections into the future show a cooling period on the horizon. Early 2017 reporting shows that three of the top four metros in the country have seen double-digit percentage declines in a number of multifamily permits issued than it did the year before. Thus, the projected pipeline of new apartment deliveries for 2018 is down significantly in every major metro area. It seems likely that some of the scheduled delivery for 2017 will push to 2018 and further adjust the actual figures. Even with that likelihood, the numbers and writing is on the wallâ&#x20AC;ŚThe construction boom is slowing. As a percentage of the whole, a market like Los Angeles is

APARTMENT DEVELOPMENT PIPELINE MSA NAME

2016

2017

2018

New York Dallas Houston Atlanta Washington, D.C. Los Angeles Seattle Denver Nashville Austin Charlotte Chicago Anaheim Orlando Boston

14,466 17,420 21,993 9,515 9,831 9,301 8,395 7,012 6,675 9,440 8,844 7,091 2,829 4,919 5,474

27,210 23,821 17,313 13,210 13,141 12,657 11,287 10,261 8,364 8,230 7,916 7,636 6,795 6,285 5,863

13,312 7,529 956 3,928 7,997 7,797 3,589 1,994 696 1,868 2,425 3,929 1,682 1,353 3,452

SOURCE : AXIOMETRICS

TOP PERMITTING METROS FEBRUARY-17 Rank

Metro

1 2 3 4 5 6 7 8 9 10

New York Dallas Seattle Los Angeles Atlanta Denver Washington, DC Phoenix Houston Chicago

12-Month 12-Month Multifamily Multifamily Units Units Permitted Permitted FEB 2016

26,850 20,263 14,386 13,937 12,129 11,771 9,853 9,097 8,940 8,892

65,188 23,293 11,566 16,450 12,052 8,925 8,895 6,165 17,699 7,051

Change % Change -38,338 -3,131 2,820 -2,513 77 2,846 958 2,932 -8,759 1,841

-58.8% -13.4% -24.4% -15.3% 0.6% 31.9% 10.8% 47.6% -49.5% 26.1%

SOURCE: AXIOMETRICS, US CENSUS BUREAU

much less effected by the new units coming to market as it relates to occupancy and rent growth. Throughout the Los Angeles metro area there are approximately 1.25 million apartment units, so adding just over 12,000 additional units this year, won’t make much of a splash. Meanwhile on the jobs front, the area has added jobs at a rate just slightly below the national average. On the other end of the spectrum, Dallas is delivering 88% more units than the Los Angeles area and contains less than half the total apartment stock when compared to LA. The construction pipeline has been one to watch as rent growth for DFW has tapered off in core locations. For those who

currently own and operate as well as those who have been a part of “crane city” will likely welcome a slight slowdown as the new units get absorbed into the market. The good news is that year over year job growth for the DFW market has remained strong and is statistically among the top of all major metro areas in early 2017 reporting. The area’s largest gain was in leisure and hospitality sector, which represented a number three times higher than that of the nationwide average. The continued migration of companies to the DFW area will help boost the job numbers and ultimately keep occupancy and rent growth on a positive track in the submarket.

M AT T H E W S T M M AY 2 0 1 7 | 2 1

S O URC E: RCA

Austin TRANSACTION VOLUME Ending the year with a total of 226 transactions, itâ&#x20AC;&#x2122;s apparent that 2016 was an active year for Austin. The market then launched into the first quarter of 2017 with 32 transactions. Looking back on 2016, the number of transactions was constant, around 50 transactions per quarter with a jump in the fourth quarter to 70 transactions. Q1 of 2017 settled down a bit with a mere count of 32. However, the average transactions per quarter for the last five quarters continues to remain just north of 50. As Austin is set to be one of the fasted growing economies leading up to 2020, there is a minimal concern that the number of transactions will settle down.

TOTAL DOLLAR VOLUME In review, Austinâ&#x20AC;&#x2122;s 2016 multifamily market locked $2,252,647,332 in volume. In 2016, the first two quarters were consistent with enormous volume spikes in Q3, north of $600 million, and Q4, approaching $1 billion. After the huge spike in Q4 of 2016, Q1 settled down with a dollar volume of $144,775,543. Although the first quarter saw an incredible drop in dollar volume from Q4 of the previous year, the market indicates tremendous upside as the Austin economy and population are projected to continue to experience growth.

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AVERAGE PRICE PER UNIT $ 2 00, 000 $ 150, 000 $ 100, 000 $50, 000

Austinâ&#x20AC;&#x2122;s average price per unit in 2016 came in at $151,039.25. This total was brought on by a strong first and second quarter, $126,332 and $133,886 respectively. The third quarter came in even higher at $180,970 a unit, while the fourth quarter settled at $162,969. In the first quarter of 2017, the average price per unit was not as strong as Q3, and Q4 as the previous year at $138,435. The discrepancy between price per unit variations can be reflected by where the transactions occurred. Q1 and Q2 of 2016 and Q1 of 2017 are considerably lower than Q3 and Q4 of 2017. While Q1 and Q2 of 2016, and Q1 of 2017 took place in secondary Austin markets (including properties north and south), Q3 and Q4 were in prime locations such as the downtown and university markets.

AVERAGE PRICE PER SF $ 180 $170 $1 60 $150 $140

6.00 % 5 .75 % 5 .5 0% 5 .25 % 5 .0 0%

Austinâ&#x20AC;&#x2122;s average price per square foot in 2016 came in at $157.16. This number was brought on by a strong first and second quarter demanding $141.48 (Q1) and $148.13 (Q2). The third quarter came in highest at $175.72 a square foot, while the fourth quarter settled at $163.30 a square foot. In the first quarter of 2017, the average price per unit was not as strong as Q3, and Q4 as the previous year was at $148.51. Again, the discrepancies of price per square foot can be explained by transaction locations. The price per square foot in the Austin market is reassuring as it continues to float at a strong price.

AVERAGE CAP RATES Cap Rates remained high through the entire year of 2016 averaging at 5.6%. Throughout the year Cap rates remained relatively constant fluctuating 40 basis points up and down. Q1 of 2016 started strong at 5.39% and the year ended with a Q4 at 5.69%. 2017 started strong with Q1 at 5.26% and continues to look promising as inventory is low and demand remains high.

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60 50

TRANSACTION VOLUME The transaction volume in Dallas-Fort Worth remained relatively consistent throughout 2016, with a low of 43 transactions in Q1 and a high of 56 transactions in Q3 and Q4. The total number of transactions in 2016 totaled 201. Additionally, Q1 of 2017 saw 27 total transactions which illustrate a sharp decline in quarterly volume compared to 2016.

$250,0 00

$250

$20 0,0 00

$200

$150,0 00

$150

$1 00,0 00

$100

$50,0 00

$50

AVERAGE PRICE PER UNIT AND PER SF The momentum in pricing seen in 2015 in the Dallas-Fort Worth market carried over to 2016 with an average price per unit of $102,566 in Q1, $127,687 in Q3, and $121,705 in Q4 of 2016. Q2 of 2016 saw the lowest price per unit averaging out at $83,126. Q1 of 2017 saw an average price per unit of $106,057, representing a slight increase versus Q1 of 2016. The same trend was seen in the average price per square foot, with Q2 2016 being the weakest performing quarter at $85.63 per square foot, and Q3/Q4 displaying the strongest performance at $119.52 and $127.54 per square foot, respectively.

8 .00% 7.50% 7.00% 6.50% 6.00%

AVERAGE CAP RATES The average cap rate in 2016 remained relatively consistent with a low of 5.89% in Q3 2016 and a high of 6.94% in Q1 2016. With an average cap rate of 6.76% in Q2 2016 and 6.52% in Q4, the average cap rate seen in 2016 was 6.52%, which is approximately 44 Bps higher than the 6.08% average cap rate seen in Q1 2017. With the average cap rate declining from 6.94% in Q1 2016 to 6.08% in Q1 2017, The Dallas-Fort Worth market continues to heat up and remains aggressive.

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TRANSACTION VOLUME 2016 saw a pretty consistent flow of transactions with the majority of them occurring in Q2 and Q3. Transaction volume peaked in the third quarter of 2016 with 69 transactions. There was a downward trend in sales from the final quarter of 2016 to the first quarter of 2017 with 52 and 29 sales respectively.

AVERAGE PRICE PER UNIT $ 2 00,0 00 $ 150,0 00 $ 100,0 00 $50,0 00

$ 225 $ 20 0 $175 $ 15 0 $ 10 0 $50

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The beginning of 2016 started out strong with an average price per unit of $177,494 in the first quarter. The high price point could have been partly due to the small volume of transactions in Q1, but a high total dollar volume of $2.17 billion. Those numbers cooled off in the following two quarters, where over 60 transactions took place. The average price per unit in the second quarter dropped off to $62,302. Those numbers began to trend upwards with $75,743 per unit in Q3 and $106,679 per unit in Q4. The first quarter of 2017 saw the fewest number of transactions, thus yielding an average price per unit of $54,185.

AVERAGE PRICE PER SF The average price per square foot for apartment sale in 2016 were relatively consistent until the final quarter of the year. The largest variation was from Q3 2016 to Q4 2016 where the average price per foot fell approximately 84%. The average price per foot for 2016 equaled $175.75. The first quarter of 2017 saw a significant drop off with a price per foot of $72.81

SOURCE : RCA

9.00% 8 .50% 8.00% 7.50% 7.00%

AVERAGE CAP RATES The average cap rate for sales in Q1, Q3, and Q4 of 2016 stayed in a relatively tight range, in the mid to low 7% cap rate range. However, the average cap rates between Q1 and Q2 rose over 150 basis points. Cap rates began to normalize after Q2 with rates in Q3 and Q4 being 7.67% and 7.39% respectively. The first quarter of 2017 saw only 29 sales and the average cap rate was 8.69%.

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San

A nto ni o TRANSACTION VOLUME

In the review of 2016, there was a total of 139 transactions in San Antonio. The number of transactions for Q1 and Q2 averaged roughly 29 sales, while Q3 and Q4 jumped up to 41 transactions. During the first quarter of 2017, transactions settled down with a total of 23 sales. Though, as San Antonio is set to be one of the fastest growing economies, and the Metroplex continues to grow, there is minimal concern for an economic setback.

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TOTAL DOLLAR VOLUME $ 2 50 M $200 M $15 0 M $1 0 0 M $5 0 M

$250,000 $200,000 $150,000 $100,000 $50,000

San Antonio’s 2016 multifamily market locked $743,488,437 in volume. In 2016, the first quarters were relatively consistent until the enormous volume spikes in Q4, north of $250 million. After the tremendous spike in Q4 of 2016, Q1 2017 settled down with a dollar volume of $50,125,247. Although the first quarter had an incredible drop in dollar volume from Q4 of the previous year, the market indicates tremendous upside as the entire Central Texas economy and population are projected to experience tremendous upside.

AVERAGE PRICE PER UNIT San Antonio’s average price per unit in 2016 came in at $100,031.25. This number was brought on by a strong first and fourth quarter, $109,481 and $120,821 respectively. The second and third quarters average out at around $85,000. In the first quarter of 2017, the average price per unit was not as strong as Q1 and Q4 as the previous year at $89,669 but still remained higher than Q2 and Q3.

$ 25 0

AVERAGE PRICE PER SF

$ 20 0

San Antonio’s average price per square foot in 2016 came in at $106.15. This number was brought on by an incredibly strong first quarter at $126.54. The second and third quarters came in at $94.28 and $92.13 a square foot, while the fourth quarter heated up at $111.66 a square foot. In the first quarter of 2017, the average price per unit stayed constant with the end of 2016 coming in at $110.61.

$ 15 0 $ 10 0 $50

8.0 0 % 7.50 % 7.0 0 % 6 .5 0 % 6 .0 0 %

AVERAGE CAP RATES With an average of 6.93%, cap rates were able to remain strong through the entire year of 2016. Throughout the year cap rates fluctuated 140 basis points up and down ending at the lowest in Q4 at 6.22%. Q1 2017 remained steady with an average of 6.57% and continues to look strong as inventory within the desirable markets continue to remain low and demand remains high.

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TRANSACTION VOLUME 2016 saw a steady flow of transactions throughout the year, with 51% of sales taking place in the first half of the year and 49% in the second half. With just over 100 total sales, transaction volume peaked in the second quarter of 2016. The number of sales has been on a downward trajectory, ending the first quarter of 2017 with 69 total transactions. This number represents a 23% decrease in transaction volume from the prior year.

AVERAGE PRICE PER UNIT The beginning of 2016 saw strong multifamily metrics with the sales in the first half of the year averaging approximately $150,000 per unit. The second half of the year met a sharp decline in this price point with the third and fourth quarters reflecting averages of $119k and $115k per unit respectively. This wide swing is likely due to many building sales that included a higher percentage of studio and one bedroom units, thus skewing this price metric. The first quarter of 2017 has shown a slight rebound back up to $124k average price per unit.

$25 0,0 00 $20 0,0 00 $15 0,0 00 $10 0,0 00 $5 0,0 00

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$2 50 $2 00 $150 $1 00 $50

8 .00% 7.50% 7.00% 6.50% 6.00%

AVERAGE PRICE PER SF The average price per square foot for building sales in 2016 and the first quarter of 2017 have stayed in a relatively tight range. The largest variation was from Q2 2016 to Q3 2016, where the average price per foot fell just over 36%. For 2016 the average price per foot equaled $153.53. Q1 of 2017 has seen a slight increase to $166.70 per foot or an 8.5% increase from the previous year.

AVERAGE CAP RATES The average cap rate for sales in the first three quarters of 2016 hovered in the low 6% range with little deviation across this period. Since that time, we have seen cap rates compress to sub 6% levels, with Q4 2016 coming in at 5.84% and Q1 2017 compressing further to a reported average of 5.68% across the 69 sales in this quarter. The Q1 2017 average cap rate equates to a 7.2% decrease from the average cap rate in Q1 2016.

Em pire M AT T H E W S T M M AY 2 0 1 7 | 3 1

TRANSACTION VOLUME

Hollywood and Koreatown are two of the most active areas of Los Angeles. The total number of Real Estate transactions has been steady over the last year ranging from a low of 53 in 2016 Q1 to a high of 65 in 2016 in both Q2 and Q3. The start of the 2017 year has shown a slight decline down to 41 transactions. However, this may be partially due to a changing political scene that has caused both buyers and sellers to take a pause. Once the dust settles, the market should be back to its highly active form.

Rent Cont rol

Non R ent Cont rol

TOTAL DOLLAR VOLUME $ 2 50 M $200 M $ 150 M $100 M $5 0 M

Rent Cont rol

Non R ent Cont rol

Overall, the dollar volume for rent controlled properties remained very consistent sitting in the 150 -160 MM each quarter for the entire 2016 year. The drop in dollar volume in 2017 Q1 can directly be correlated to the drop off in overall transactions. Non-rent controlled properties illustrate a drastic difference between volume in each quarter. 2016 Q1 and Q3, and 2017 Q1 all saw massive volume due to three large Hollywood sales on 1724 N Highland Ave, 1714 N McCadden Place and 1710 N Fuller Ave selling at $132,500,000, $109,000,000 and $98,000,000 respectively.

Kore a t own &

Ho l l ywood

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AVERAGE PRICE PER UNIT & PER SF Price per unit and price per square foot saw consistency over the last year proving the strength of the Real Estate Market in these areas. Rent controlled buildings hovered around 200K a unit with mid $200-$300 per square foot, the latter seeing an uptick over the last two quarters. The uptick is mainly due to smaller unit sized properties being purchased in better areas of Hollywood that drove the price per square foot up. Non-rent controlled properties saw a similar consistency ranging, but similar to dollar volume saw some drastic changes from Q2 to Q3 because of the outlier sales that happened during this time.

$5 0 0 , 0 0 0

$500

$ 4 00, 000

$400

$ 3 00, 000

$3 00

$2 0 0 , 0 0 0

$200

$ 1 00, 000

$100

R ent Cont rol

Non Rent Cont rol

AVERAGE CAP RATES Could not be more consistent over the past year for GRM and Cap Rate for Rent Control and Non Rent Control Properties. Many decisions for purchase of real estate during this time can be seen solely by the income and it is shown in this consistency. Buyers and Sellers were coming together on one key aspect and that was what the property was producing.. A 4 percent return and not being a 16 GRM was, on average, the sweet spot for sales in Hollywood and Koreatown last year and continuing into this year. Because of the small amount of Non Rent control transactions along with a couple outlier sales the GRM did not stay as consistent seeing a range from 14.91 in 2016 Q4 to 19.4 in Q1 of the same year. The drop could be alarming if it were not for the spike back up in 2017 Q1 and the understanding of some of the unique sales that took place.

4 . 75 % 4.50% 4 . 25 % 4.00% 3 . 75 %

Rent Con trol

Non Ren t Control

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Or ange

C o u nt y

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$350

$300

$250

$200

$ 15 0

TR ANSACTION VOLUME

AVERAGE PRICE PER SF

Transaction volume ramped up throughout 2016 with the second half of the year outpacing the first half by just over 50%. The second half of the year accounted for 60% of the total number of transactions for all of 2016. Q1 2017 transactions were down 15% from Q4 2016, but still up over 20% from the first quarter the year prior. Q3 2016 was near the top of transaction volume with 88 sales but was by far the biggest quarter for dollar volume and the average deal size at $10M was 37% higher than the next highest quarter, which was Q1 2017 at $7.3M.

The Orange County market boasts a very healthy average cost per unit with 2016 averaging out to $256k per unit for the year. Q3 2016 saw a sharp decline in this average, but rebounded nicely in Q4 2016 with over a 30% increase from Q3 to Q4. Q1 of 2017 has resulted in another steep decline with a $235k average that represents a 24% decrease from the previous quarter. However, at $235k, Q1 2017 is only slightly below the average price per unit of $244k for the data set.

$352,000

5.00%

$30 0,000

4 . 75 %

$ 275,000

4.50%

$ 250,000

4 . 25 %

$225,000

4.00%

AVERAGE PRICE PER UNIT

AVERAGE CAP RATES

Over the course of 2016 and first quarter of 2017, the average price per building square foot has come in at $280. The low mark in this price metric was set in Q2 2016 at $238 per foot, while the high was a whopping $315 per foot in Q4 2016. Q1 of 2017 has performed just above the average at $285 per foot, which is a drop from just over 10% from the previous quarter.

Average cap rates for sales throughout 2016 experienced a steady decline from 4.62% in Q1 to 4.30% in both Q3 and Q4. This cap rate compression was reversed in Q1 2017 as the average cap rate in that quarter rose to 4.45%. This figure is still lower than the average of 4.62% in Q1 2016. The average cap rates were lowest in both Q3 and Q4 of 2016 at 4.30%, but while the cap rates remained static in those quarters, the cost per unit and cost per foot both increased dramatically in Q4.

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TRANSACTION VOLUME

The San Fernando Valley remained an incredibly active area of Los Angeles, with 362 multifamily transactions taking place. With a total of 272 rent controlled buildings trading from Q1 2016 to Q1 2017, a majority of these sales were rent controlled buildings. This could be attributed to the fact that the bulk of the multifamily buildings in the San Fernando Valley were built before 1978. Also, investors with non-rent controlled units have been incentivized to hold their assets because of steadily increasing rents throughout the whole of Los Angeles.

Rent Cont rol

Non R ent Cont rol

TOTAL DOLLAR VOLUME $2.5 B $2 B $1.5 B $1 B $500 M

Rent Cont rol

Non R ent Cont rol

Almost four billion dollars of transaction volume occurred between Q1 2016 and Q1 2017. This number is no surprise, as Los Angeles contains some of the most expensive and desired real estate in the country. Almost three billion dollars of transaction volume was attributed to non-rent controlled multifamily buildings. Though the number of transactions was fewer with non-rent controlled assets, there were several sales of 100+ unit assets, which helped to drive up dollar volume. Non-rent controlled assets also trade more aggressively than their rent controlled counterparts, supporting the discrepancy in dollar volume between rent controlled and non-rent controlled buildings.

S an F e r na ndo

Va lley

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AVERAGE PRICE PER UNIT

$ 50 0 , 0 0 0

Price per unit fluctuated with rent controlled assets, with year over year having just a slim difference. Rent controlled properties dipped mid-year, hitting $187,112 before eventually climbing back up to $202,177. Nonrent controlled properties followed a different trend and steadily rose throughout all of 2016, with a small dip in 2017. This could be attributed to steadily increasing rents allowing these assets to follow a similar trend.

$ 4 00, 000 $ 3 00, 000 $ 2 00, 000 $ 1 00, 000

Rent Cont rol

Non R ent Cont rol

AVERAGE PRICE PER SF

$500

Price per square foot of rent-controlled buildings followed a U-shaped trend with year over year averages being the high points and the middle of the year being the low points. Q3 had the weakest showing with an average of $233.34 price per square foot. Similar to the price per unit, price per square foot for non-rent controlled assets climbed throughout 2016 with a small dip into 2017, most likely contributed to steadily increasing rental rates.

$400 $300 $ 2 00 $100

Rent Cont rol

Non R ent Cont rol

AVERAGE CAP RATES

5.00%

Cap Rates stayed aggressive for both rent controlled and non-rent controlled assets. Rent controlled buildings ranged from 4.55% average cap to 4.05% average cap. Non-rent controlled buildings ranged from 4.46% average cap to 4.19% average cap. Both of the lowest average cap rates for both rent controlled and non-rent controlled buildings occurred in Q1 2017. With continued competition in the market and favorable interest rates, it was no surprise Q1 2017 had a strong showing.

4 . 75 % 4.50% 4.25% 4.00%

Rent Cont rol

Non R ent Cont rol

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TRANSACTION VOLUME South Los Angeles County has had a consistent amount of activity over the last five quarters. Overall, this area averaged 25.8 transactions a quarter with no drastic change from quarter to quarter. The first three months of this year had roughly 40% fewer transactions than we saw in Q4 of 2016. This drop off is likely due to hesitation in the market derived from political uncertainty. After Trump was elected, many potential sellers decided to wait and see how the market would react instead of going through with a sale.

TOTAL DOLLAR VOLUME Overall, the total dollar volume declined over the last five quarters. However, the data is somewhat misleading as sale price per deal has remained consistent except for a couple of outliers. Most of the sales in this region are capped at around 3 million dollars. Q1 of 2016 had one 30 million dollar deal and two deals that sold for roughly 15 million dollars. Q4 of 2016 did not have many large deals close. Besides that, the changes in total dollar volume are mirrored by the changes in the number of transactions.

S ou th

Los Angeles

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AVERAGE PRICE PER UNIT $250,000 $200, 000 $175, 000 $150, 000 $125, 000

The average price per unit has also remained relatively consistent when excluding outliers. The spike in Q1 of 2017 may partially be explained by the smaller sample size of transactions. However, the hesitation in the market during that quarter also explains the higher price per unit. Typically, smaller buildings sell for higher prices per door. Larger buildings experience economies of scale with this metric. Sellers of large buildings would be more sensitive to hesitations in the market which is why less large buildings sold that quarter versus small buildings. Thus, resulting in a higher average price per door.

$3 0 0

AVERAGE PRICE PER SF

$ 2 75

The average price per square foot is a useful statistic to compare prices in the market across different buildings of ranging sizes, more so than the price per unit. Over these five quarters, we have seen a steady increase in the average price per foot sold. This increase tells us that while many owners were hesitant to sell in our most recent quarter, sellers who did sell were able to achieve higher prices for their buildings.

$2 50 $2 2 5 $2 0 0

5.25% 5.00% 4 . 75 %

AVERAGE CAP RATES Cap rates have not significantly changed over this period. Q2 of 2016 was a little higher due to 2 outliers in that sample. The increase in average price per square foot tells us that buyers are

4. 5 0 % 4.25%

paying more for buildings than they used to. However, they are still achieving the same return on their investment. This insinuates that while building prices have gone up, rents have gone up as well. Owners are now receiving more revenue for their more expensive buildings.

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Tri Ci t i es GLENDALE, BURBANK, PASADENA, AND SOUTH PASADENA

TRANSACTION VOLUME Transactions stayed relatively steady quarter over quarter with Q3 2016 having the highest amount at 41. Overall the average was about 32 sales per quarter. Q2 2016 had the lowest number of transactions at 25, as well as the lowest total dollar volume at $66,227,000.t

TOTAL DOLLAR VOLUME Q2 2016 came in with the lowest total dollar volume, but an increase in average price per unit and price per SF. Total dollar volume was rising steadily into Q3 and Q4 of 2016 but dropped by 65% in Q1 2017.t

$400,000 $350,000 $ 300,000 $250,000 $ 200,000

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AVERAGE PRICE PER UNIT The average price per unit increased steadily from Q1 2016 to Q4 2016 by 74% but then dropped by 27% in Q1 2017. Q4 2016â&#x20AC;&#x2122;s average price per unit was $380,703, which was way above the average of $275,755 throughout 2016 and into 2017.

S OURCE : RCA

AVERAGE PRICE PER SF $ 450 $ 400 $ 350 $300 $2 50

4.00% 3 . 75 % 3.50% 3.25% 3.00%

The average price per square foot increased steadily from Q1 2016 to Q4 2016, with a dip in Q3 2016. Overall it started at $282.77 at the end of Q1 2016 and reached $398.67 by the end of the year. This metric dropped at the end of Q1 2017 by 15%, just like the average price per unit fell into the new year. The decline could be a factor of the 10-year treasury; which increased in November of 2016, impacting interest rates. This change in rates caused the cost of capital to increase, not allowing investors to pay prices like $398/SF and $380,000 per unit. By the end of Q4 2016 and going into Q1 2017, investors could not pay the prices they were paying before.

AVERAGE CAP RATES Cap Rates got more aggressive towards the end of Q3 2016 but increased to an average of 3.90% by the end of Q4, which went against the high average price per unit and high average price per SF. Interesting enough, when prices dropped in Q1 2017, cap rates started to decline as well.

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State of Financing Q & A with Brian Krebs

One of the primary factors contributing to the success or failure of a real estate investor’s assets is the condition of the financial markets. Matthews REIS TM recently sat down with Brian Krebs, Managing Director of Barrington Capital, to discuss the current state of CRE financing in the US, where the market may be headed and how it will affect commercial real estate.

HOW DOES THE CURRENT STATE OF THE FINANCIAL MARKETS COMPARE TO WHAT WE EXPERIENCED OVER THE PAST YEAR? Data from the first quarter of the year indicates that 2017 is off to a great start, for both investors and the lending community. Real Capital Analytics reports that the current average CRE mortgage interest rate across all product types is 4.30 percent. Overall we are seeing a net positive in Q1 compared to last year as spreads have tightened ±20 basis points, which indicates that lenders

remain competitive to push capital into the marketplace. Average cap rates for commercial and multifamily properties remain steady at 6.59 percent and 5.54 percent, respectively, to end the first quarter. The landscape remains active. Investors that sold to exchange into another asset are seeing large returns on properties purchased over the last 5-10

years. For property owners, average rental rates continue to rise in 2017 and landlords continue to maintain healthy occupancy ratios. Additionally, debt service coverage ratios ended January at a historically high average of 1.73x which is a very positive sign.

THE FIGURES ARE POSITIVE. ARE YOU OPTIMISTIC ABOUT REAL ESTATE ASSETS FOR THE REST OF THE YEAR? “My takeaway from Q1 data is that the economy remains strong and that for real estate, the trends are positive.”

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LETâ&#x20AC;&#x2122;S FOCUS IN ON COMMERCIAL REAL ESTATE FINANCING. WHAT IS THE CURRENT LANDSCAPE? Most experts in the lending market are expecting moderate change over the coming year.

if itâ&#x20AC;&#x2122;s the right asset accompanied by a strong borrower.

One factor is the Federal Reserve. The Fed has already announced that they plan for additional rate hikes this year, with the goal of combating inflation and boosting employment.

Traditional banks are expected to dominate in the mid-range debt market, along with insurance companies and other non-traditional lenders. Many regional and local banks have entered the lending market over the past 4 to 5 years. Typically, these smaller banks have less stringent underwriting guidelines and are more aware of values and local market fundamentals

Lenders are responding by actively seeking opportunity in the market and remaining competitive. For example, we are seeing lenders beginning to offer 30-year amortization periods for the acquisition of single tenant retail investment,

WHAT THE CURRENT STATE OF PRIVATE CAPITAL FOR LENDING? The overall outlook is that private capital is expected to continue to grow rapidly as an alternative financing source in 2017. Private lenders are attracted to the higher yields borrowers are willing to pay. To boost that return, their focus is primarily on larger projects with higher risk, which including value add and

construction projects. Private lenders are able to take on that additional risk because they do not have to conform to the same rules and regulations as traditional lenders. For the borrower, that can mean increased flexibility, not only in terms but also in how the loan is structured.

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ARE YOU SEEING ANY NEW TRENDS IN CRE FINANCING? Yes, new alliances. Banks are active to get in on the larger returns from large real estate loans, but their guidelines keep them on a shorter leash. So they’re participating with unconventional lenders. This has become more prevalent in the construction lending market where banks and

nontraditional lenders increasingly teaming up to provide developers with the capital required for their projects. This would never happen under normal market conditions due to the complications that can arise from using multiple capital sources.

YOU MENTIONED TRANSACTION VOLUME. HOW DOES FIRST QUARTER COMPARE TO 2016? Q1 of 2017 started off very slow. Looking at transaction volume year over year, January 2017 showed a decrease of 41 percent in total dollars compared to the same period last year. Most economists attribute the drop to the unusually partisan and strident atmosphere that accompanied the recent election. A mood of uncertainty pervaded the nation in Q4 of 2016.

That mood translated into uncertainty in the real estate marketplace – we started the year with an inflated gap between buyers and sellers on where cap rates are headed. Even when Trump took office in January, buyers and sellers remained wary because of the election and how that would affect interest rates as well as tax policy.

ARE YOU MORE UPBEAT ABOUT TRANSACTION VOLUME AS THE YEAR PROGRESSES? The valuation gap between buyers and sellers needs to start narrowing. If we can see spreads continue to come in, I would expect transaction volume to increase. Historically, most deals get done in the third and fourth quarters. I should point out another factor that has contributed to the decline in volume: China. The

Chinese government is instituting new policies that limit cash outflow from the country. Since Chinese investors are the single largest source of foreign investment in U.S. real estate, those policies could end up depressing transaction volume.

ARE COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS) GOING TO BE A FACTOR IN THE MARKET? It’s not exactly a science when making a predication that involves CMBS. Regulations play such a big role. There’s talk on Capitol Hill of changing some lender guidelines but in the current political atmosphere, it’s hard to make a prediction.

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WHY IS THE ISSUE OF CMBS SO HARD TO PREDICT? The most contentious issue and the one that could have the biggest impact on commercial real estate lending is capital requirements. And to understand why the issue is so difficult, we first should look at how the regulations were generated in the first place. As many investors and developers will recall, CMBS was introduced to mitigate and spread risk amongst a pool of commercial and multifamily mortgages. Since mortgages traditionally have relatively low rates of default, it makes sense. However, the reality was that lenders became careless in their lending standards, with the thought that all of the risks were transferred to the bondholders. As volume and profits exploded,

lenders began to originate loans of higher-risk in the product mix, arguing that the higher-quality ‘tranches’ of loans would offset the risk posed by lower-quality loans. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required lenders to have higher capital reserves to offset potential losses. Since CMBS investors and loan originators had ‘skin in the game,’ CMBS lending volume slowed, but the quality of the loans being made improved. Dodd-Frank requires that the lender must hold 5 percent of the loan for a period of five years.

WHAT IS THE CURRENT STATE OF THE CMBS MARKET AND WHAT IS THE OUTLOOK GOING FORWARD? Definitely an improvement over the last six months. The large volume of loans securitized in 2007 are coming due and creating many opportunities for both lenders and the brokerage community. Delinquency rates ended March 2017 at 5.37 percent, which is 1.15 percent higher than the same period past year.

New regulations that could potentially affect lending guidelines will continue to be introduced. I would expect this to result in lenders widening out spreads to compensate for the increased amount of risk retention.

M AT T H E W S T M M AY 2 0 1 7 | 4 5

WHAT IMPACT DO YOU SEE FROM THE MARCH MEETING OF THE FEDERAL RESERVE? Considering the second half of 2017 and into 2018, mortgage rates will slowly catch up with the treasury and cause cap rates to follow. This will, in turn, entice buyers to invest in more property and continue to increase volume as we get deeper into this year. Despite the fact that the Fed will increase rates fractionally, developers are going to keep borrowing money for and investors will continue to see commercial real estate as an attractive sector.

Weâ&#x20AC;&#x2122;ll see a sorting out of loan sourcing, with traditional banks sticking to their niche of midsized loans and private capital and non-traditional finance sourcing will play a bigger role, especially with higher-risk properties. Weâ&#x20AC;&#x2122;re likely to see more creative financing develop in how deals are structured. Overall, the outlook for commercial real estate is very good, with solid fundamentals and growing momentum in the market. This is an exciting time in the business!

HOW WOULD YOU CHARACTERIZE THE COMMERCIAL REAL ESTATE MARKET FOR THE REST OF THE YEAR? Considering the second half of 2017 and into 2018, interest rates will slowly continue to increase and cap rates will follow. As rates increase, the prices investors can pay for properties must decline in order for them to achieve their targeted returns, assuming all other things remain unchanged. I anticipate this will in turn entice buyers to continue to invest in Commercial Real Estate.

Despite the fact that the Fed will increase rates marginally, many smart investors are waiting patiently, liquidating out of stabilized assets and preparing for the right time to buy and capitalize on new opportunity. The CRE landscape for the foreseeable future is positive. This is an exciting time to be in the business.

ABOUT BARRINGTON CAPITAL CORPORATION Barrington Capital Corporation (BCC) is a leading firm in providing debt financing for commercial real estate investments. The firm provides capital sources ranging from $500 thousand to $100 million for all property types across every US market. For more information please visit www.barringtoncapcorp.com

4 6 | M AT T H E W S T M M AY 2 0 1 7

Your next great investment is just a click away. LEARN MORE AT CREXi.com

M AT T H E W S T M M AY 2 0 1 7 | 4 7

stnl:

by the numbers B Y

C H A D

K U R Z

At this time last year, the market was buzzing with excitement. The annual ICSC retail conference held in Las Vegas saw more than 36,000 retail executives from around the globe. ICSC’s President and CEO, Tom McGee, raved about the attendance stating, “the numbers are being driven by an industry that is vibrant and growing.” While the industry remains vibrant, growth seems to have stalled. Q2 of 2016 appears to have been the apex of transaction volume growth and cap rate compression. After the market peaked in 2016, there began a significant decline in transactions compared to the same quarter from the previous year. The most staggering decline came during the first quarter of 2017, when there was approximately a 25% drop in transactions compared to the first quarter of 2016.

W HAT HA S C AU S E D T H E S U D D E N SHIFT IN TRANSACTION VOLUME? A variety of factors that make investors nervous. A newly elected President, rising interest rates, new administrative policies, a bullish stock market run market, e-commerce speculation and growth, and unfavorable lease structures, are all factors that can impact investor confidence. The result has been a dip in transaction volume that has been felt across the industry for STNL retail properties. Interest rates have a considerable effect on investors. When interest rates remain stable, buyers’ and sellers’ expectations are aligned and we see a balanced market. In a period of declining interest rates, buyers’ pricing expectations are greater than that of sellers’. When interest rates rise, the market becomes unbalanced and sellers’ expectations are greater than that of buyers’. 4 8 | M AT T H E W S T M M AY 2 0 1 7

Ultimately, this unbalanced market creates a decline in transactions.

Buyers typically react quicker to a shift in the market compared to sellers because they are viewing the market in real time. When interest rates spike, buyers feel the effect immediately. Conversely, sellers typically view the market through the rearview mirror as they typically rely on historical sales data and do not feel the effect of interest rate hikes until their properties do not sell. Retailers also rely on historical sales data to determine the rent on developments even before construction. When a shift in the market takes place, this can further strain the market because the sellers’ expected return is greater than their actual return.

C A P R AT E S

The average cap rate for an STNL property valued between $1M - $10M experienced five consecutive years of steady decline, hitting a low mark in 2015. In 2016, we saw average cap rates increase by nearly 15 basis points to 6.62%. Currently, the average cap rate for a property on the market is 6.14%, which is about 50 basis points lower than where they traded in 2016. This data bolsters our theory that sellersâ&#x20AC;&#x2122; pricing expectations are more aggressive than where deals are trading, throwing off the balance of the market, and leading to a decrease in transaction volume and a rise in cap rates. HAVE CAP RATES SHIFTED UP ACROSS ALL STNL PRODUCT TYPES? Secondary and tertiary markets have caused the largest uptick in cap rates. The days of selling credit tenant deals, such as a Dollar General, in a tertiary market at a 6.50% cap rate appear to be a thing of the past. In todayâ&#x20AC;&#x2122;s market, stabilized assets located in strong geographical areas are still trading at historically low

cap rates. For example, the difference between a QSR located in a core market compared to a tertiary market can differ as much as 200 basis points with all other factors remaining the same between the two assets. We also see a large spread between strong performing locations compared to average or below average performing locations. For example, a Walgreens deal on a long-term lease with strong store sales, compared to that of below average store sales, can differ as much as 100 basis points.

Through the first quarter of 2017, there were roughly ten more properties listed for sale daily than properties traded. This creates a bottleneck in the net lease industry. With an increased supply of inventory and a decrease in demand, simple economics tells us that both price and quantity will reduce. The data tells us that in addition to lower transaction volume, we should expect the average cap rate to increase across the STNL industry. M AT T H E W S T M M AY 2 0 1 7 | 4 9

5 0 | M AT T H E W S T M M AY 2 0 1 7

O N M A R K E T D ATA

One of the main objections owners have when selling property is finding a replacement asset to fit in their exchange deadline. In todayâ&#x20AC;&#x2122;s market, there is a surplus of quality properties to choose from without having to navigate highly competitive, multiple-offer scenarios. Over the past 60 days, more than 1,500 new STNL properties have been listed for sale between $1M - $10M, with half of those priced between the $1M and $2M mark. For a seller, this means that by the time their down-leg closes, there is a new batch of inventory and a wide variety of assets to choose from. For potential sellers, it is important to understand the on-market competition and how long that asset has been on the market before pricing an asset.

W H E R E I S T H E O P P O RT U N I T Y ?

At the beginning of last year, we recommended selling non-core deals and favored trading core deals. In some scenarios, we witnessed deals trade in tertiary markets only 100 basis points higher than those in core markets and we still believe selling tertiary deals to trade into core deals is an excellent opportunity and a preferred way to preserve equity in this changing market.

This year, take advantage of selling low performing assets with longterm leases, and moving into strong performing assets, regardless of the lease term. We have seen fantastic opportunities across all retail verticals. For example, a Walgreens deal with 15 years remaining on a lease, and below average store sales in a secondary market, is selling around a 6.50% cap rate, conservatively. Whereas a Walgreens with five years remaining on the lease, above average store sales, in a strong market, is conservatively trading at a 7.25% cap rate. WHICH IS THE SAFER INVESTMENT IN THE FUTURE? The site with strong sales in a good market that will ultimately be a better investment in terms of total cash flow and long term equity. For more information, please contact: CHAD KURZ (214) 692-2927 CHAD.KURZ@MATTHEWS.COM

M AT T H E W S T M M AY 2 0 1 7 | 5 1

Key Statistics Credit Rating

AA-

Market Cap

$14.2B

# of Locations (U.S)

±8,250

Headquarters

Irving, TX

Cap Rate Comparison New Construction (15 years)

4.75%-5.00%

10 Years Remaining

5.25%-5.50%

5 Years Remaining

5.75%-6.35%

Current on Market Data # of Properties

±30

Average Cap Rate

5.38%

Average Lease Term Remaining

7.3 years

Average Price

$2,446,850

Lowest Cap Rate

3.75%

Highest Cap Rate

7.72%

2015

2016

5.43%

5.44%

Average Term Remaining

8.36 years

8.68 years

Average Price

$1,966,100

$2,283,350

Transactions Average Cap Rate

Continuously innovating, 7-Eleven continues to introduce new products as they search for new flavors, better recipes, and useful inventions to satisfy time-constrained customers. Keeping pace with the ways technology is redefining how people shop, 7-Eleven has invested in software and business processes that have revolutionized store operations. Furthermore, stores reap the benefits from the strong marketing campaigns and advertisements, including national TV and radio commercials, social media, special events and promotions and even public relations support. 8%

7.5%

C a p r at e c o r r e l at i o n

C a p R at e

overview

Operating, franchising and licensing more than 8,000 stores in the United States and 62,000 stores worldwide, 7-Eleven is the world's largest convenience store chain. Along with this, it is also one of the nation's largest independent gasoline retailers. As the pioneer of the convenience store concept, 7-Eleven strives to meet the needs of convenience-oriented guests 24 hours a day, seven days a week. The company's iconic products have become a substantial part of American culture from their popular Big Gulp® fountain soft drink and Big Bite® grill items to the Slurpee® beverage and its fresh-brewed coffee.

6.5%

5.5%

typical Lease structure signed

2.5

7.5

12.5

17.5

Years remaining on lease

Lease Type

Rent

Typical SF

NNN

$140K-170K w/ gas $90k-120K w/ no gas

± 2,400- 3,000 SF

Lease Term

Rent Increase

Average Sales

15 years

$1,740,000

10% every 5 years

Recent Sales Comparables City

State

Sales Price

Cap Rate

Orlando

$2,650,000

5.66%

Thornton

$3,491,735

Phoenix

Chico

Year Built

Sale Date

6.9 years

1999

1/10/17

4.84%

14.5 years

2016

11/5/16

$1,402,500

6.12%

2.3 years

1978

11/5/16

$3,400,000

5.29%

7.1 years

1998

10/26/16

Clermont

$2,850,000

4.92%

10.3 years

2012

10/18/16

Lanham

$3,894,737

4.75%

14.7 years

1990

9/10/16

Henderson

$1,085,000

5.50%

6.5 years

1978

8/26/16

Rocklin

$3,937,000

4.75%

9.2 years

2006

8/23/16

Melbourne

$2,200,000

6.80%

2.8 years

1994

3/7/16

Dallas

$4,436,000

4.50%

14.9 years

2016

2/5/16

5 2 | M AT T H E W S T M M AY 2 0 1 7

Term Remaining

overview Key Statistics Credit Rating

BBB-

Market Cap

10.53B

# of Locations

± 5,200

Headquarters

Roanoke, VA

Cap Rate Comparison New Construction (15 years)

5.90%

10 Years Remaining

6.65%

5 Years Remaining

7.75%

Headquartered in Roanoke, Virginia, Advance Auto Parts, Inc., is the largest automotive aftermarket parts provider in North America, serving both the professional installer and do-it-yourself customers. Advance Auto Parts operates over 5,200 stores in all 50 states, over 127 Worldpac branches and serves approximately 1,250 independently owned CARQUEST branded stores in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.

Current on Market Data ±201

Average Cap Rate

7.00%

Average Lease Term Remaining

± 8 years

Average Price

$1,551,834

Lowest Cap Rate

5.00%

Highest Cap Rate

10.00%

2015

2016

7.20%

6.70%

7 years

9 years

$1,481,535

$1,603,560

Transactions Average Cap Rate Average Term Remaining Average Price

Employing approximately 74,000 Team Members, the company works hard to create an environment of honesty, integrity, mutual trust, and dedication. These values have remained the same since Advance Auto Parts founding in 1929. Advance Auto Parts operates stores that primarily offer auto parts such as alternators, batteries, belts and hoses, chassis parts, clutches, engines and engine parts. 9%

C a p r at e c o r r e l at i o n 8%

C a p R at e

# of Properties

Recent Sales Comparables City

1.5

4.5

7.5

10.5

13.5

Years remaining on lease

State

Sales Price

Cap Rate

Mount Pleasant

$2,557,460

5.75%

Thompsons Station

$2,325,000

Spring

Term Remaining

Year Built

Sale Date

15 years

2017

3/28/17

6.67%

4 years

2006

2/28/17

$1,463,000

6.75%

5 years

2007

2/22/17

Norcross

$2,083,970

6.55%

10 years

1997

2/21/17

Petoskey

$2,145,000

6.29%

7 years

2014

11/8/16

Bellingham

$2,700,000

5.93%

7 years

2008

10/18/16

Albuquerque

$2,427,242

5.63%

15 years

1965

3/14/16

Lakewood

$2,200,000

5.40%

14 years

2016

1/26/16

Washington

$1,450,000

7.30%

2 years

2004

1/19/16

$1,512,000

6.25%

14 years

2015

11/16/15

Pontiac

typical Lease structure signed Rent

Typical Square Feet

NNN

$110,000

± 7,000 SF

Lease Term

Rent Increase

Average Sales

15 years

In options

$1,700,000

Lease Type

M AT T H E W S T M M AY 2 0 1 7 | 5 3

Founded by the Albrecht family, the first ALDI store opened in 1961 in Germany, making ALDI the first discounter in the world. Headquartered in Batavia, Illinois, ALDI now has more than 1,600 stores across 35 states, employs over 24,000 people and has been steadily growing since opening its first US store in Iowa in 1976.

overview Key Statistics Credit Rating

With more demand comes more stores. Over the past decade, the company has nearly doubled in size and by 2018, ALDI will bring its total number of US stores to nearly 2,000 – opening their doors to 650 new locations, including Southern California. ALDI sells the most frequently purchased grocery and household items, primarily under its exclusive brands, which must meet or exceed the national name brands on taste, quality, and price. In fact, ALDI is so confident in the quality of its products, the company offers a Double Guarantee: if for any reason a customer is not 100 percent satisfied with any ALDI food product, ALDI will gladly replace the product and refund the purchase price. Source: Aldi

Private

Market Cap

$14B

# of Locations (U.S)

±1,600

Headquarters

Batavia, IL

Cap Rate Comparison New Construction (15 years)

4.50-5.00%

10 Years Remaining

5.50-6.00%

5 Years Remaining

6.50-7.50%

Current on Market Data # of Properties

±3

Average Cap Rate

4.28%

Average Price

15.2 years

$4,251,372

6.5%

Lowest Cap Rate

4.00%

Highest Cap Rate

4.59%

2015

2016

4.82%

6.14%

16.88 years

9.5 years

Transactions Average Cap Rate Average Term Remaining Average Price

$4,569,634

C a p R at e

Average Lease Term Remaining

C a p r at e c o r r e l at i o n

5.5%

4.5%

2.5

7.5

12.5

17.5

Years remaining on lease

$2,682,500

typical Lease structure signed Lease Type Ground Lease, NNN

Rent

Typical Square Feet

$150,000 - $190,000

± 17,000- 20,000 SF

Rent Increase

Lease Term

5-10% every 5 years

20 years

Recent Sales Comparables City

State

Sales Price

Cap Rate

Tullahoma

$1,889,000

4.50%

Wadsworth

$2,335,000

Cottage Grove

Arcadia

Year Built

Sale Date

19.5 years

2016

1/13/17

6.00%

9.5 years

2016

6/17/16

$3,030,000

6.28%

9.4 years

2001

5/31/16

$9,700,000

4.25%

10 years

2016

12/24/15

Petoskey

$5,203,535

4.95%

19.5 years

2015

8/28/15

Hueytown

$1,400,000

5.00%

19.5 years

2014

2/23/15

Cumming

$1,975,000

5.06%

18.5 years

2014

2/6/15

5 4 | M AT T H E W S T M M AY 2 0 1 7

Term Remaining

Overview Key Statistics Credit Rating

N/A

Market Cap

$983.35M

# of Locations

± 1,858

Headquarters

Glendale, CA

Cap Rate Comparison New Construction (15 years)

6.15%

10 Years Remaining

6.62%

5 Years Remaining

6.98%

Current on Market Data # of Properties

Applebee’s is one of the world’s largest casual dining brands, restaurants across the United States, Puerto Rico, and 15 other countries around the globe. The company was founded in Atlanta, GA in 1980, bringing customers classic bar and grill menu items in a neighborhood-oriented setting. The brand prides themselves on higher-quality ingredients, reasonable prices, and quality service.

±37

Average Cap Rate

6.05%

Average Lease Term Remaining

± 12 years

Average Price

$2,984,833

Lowest Cap Rate

4.68%

Highest Cap Rate

7.35%

2015

2016

6.34%

6.22%

15 years

13 years

$2,794,200

$2,857,593

Transactions Average Cap Rate Average Term Remaining Average Price

In 2007, DineEquity, a franchising company known for bringing success to the IHOP brand, purchased Applebee’s with the goal of revitalizing the brand and providing strategic leadership to franchisees throughout the chain. All Applebee’s locations feature classic American dishes, a bar area, and serve alcoholic beverages (if legally permitted). The sites are typically located in major retail corridors of suburban markets. All of the 2,016 Applebee’s locations across the country are franchise operated.

Recent Sales Comparables City

State

Sales Price

Cap Rate

Maitland

$4,080,000

5.39%

Wake Forest

$3,800,000

New Berlin

Gaffney

Term Remaining

Year Built

Sale Date

15 years

2001

12/31/16

8.47%

15 years

2002

12/30/16

$2,204,479

6.05%

20 years

2004

12/28/16

$1,429,812

8.00%

7 years

2003

11/8/16

Brunswick

$3,206,100

7.40%

10 years

1994

11/7/16

Tallahassee

$4,875,000

6.32%

11 years

2006

10/18/16

Weatherford

$5,000,000

5.90%

25 years

2000

10/6/16

Clovis

$4,900,000

4.95%

17 years

1993

8/23/16

Auburn

$3,600,000

6.33%

12 years

1997

8/23/16

Florence

$2,000,000

8.70%

5 years

1987

8/17/16

typical Lease structure signed C a p r at e c o r r e l at i o n

C a p R at e

2.5

7.5

12.5

17.5

Lease Type

Rent Increase

NNN or Ground Lease

7-10% every 5 year or 1-2% annually

Rent

Typical SF

$177,733

± 4,500- 5,500 SF

Lease Term

Average Sales

15-20 years

$2,370,000

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 5 5

AutoZone, Inc. is the nation’s leading auto parts retailer and distributor of automotive replacement parts and accessories in the United States. It began operations in 1979 and by August 27, 2016, operated over 5,200

Overview Key Statistics Credit Rating

BBB

Market Cap

$20.24B

# of Locations

± 5,297

Headquarters

Memphis, TN

Cap Rate Comparison New Construction (15 years)

4.75%

10 Years Remaining

5.50%

5 Years Remaining

6.75%

Current on Market Data # of Properties

±11

Source: AutoZone Inc.

5.21%

Average Lease Term Remaining

± 10.7 years

Average Price

$1,878,950

Lowest Cap Rate

4.15%

Highest Cap Rate

6.90%

2015

2016

6.12%

5.56%

9.5 years

10.8 years

$1,817,805

$2,020,147

Transactions Average Cap Rate Average Term Remaining Average Price

C a p r at e c o r r e l at i o n

C a p R at e

Average Cap Rate

AutoZone stores in the United States, including Puerto Rico; 483 stores in Mexico; eight stores in Brazil; and 26 Interamerican Motor Corporation (“IMC”) branches. Each AutoZone store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. In over 4,000 of their domestic AutoZone stores, the company also offers a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts.

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Lease Type

Average Rent

Typical Square Feet

NN or Ground

$86,000

± 6,700 SF

Lease Term

Rent Increase

Average Sales

20-15 years

10% every 5 years

$1,733,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Sioux City

$1,650,000

6.25%

8 years

1990

1/24/17

Plant City

$2,420,000

5.50%

12 years

2008

12/9/16

Chapel Hill

$4,800,000

4.75%

15 years

2016

11/7/16

Harrisburg

$1,350,877

5.70%

9 years

2008

11/4/16

Glenwood

$1,750,000

7.01%

9.5 years

2006

10/21/16

Powell

$875,000

4.69%

15 years

2016

8/25/16

Torrance

$2,970,000

4.40%

7 years

1980

8/15/16

Biscoe

$1,401,000

6.85%

10.5 years

2006

7/29/16

Manning

$1,109,489

6.85%

10 years

2006

7/29/16

5 6 | M AT T H E W S T M M AY 2 0 1 7

Overview Key Statistics Credit Rating

BBB+

Market Cap

$230B

# of Locations

±4,600

Headquarters

Charlotte, NC

Cap Rate Comparison New Construction (15 years)

4.50%

10 Years Remaining

5.25%

5 Years Remaining

6.25%

Current on Market Data # of Properties

±27

Average Cap Rate

5.27%

Average Lease Term Remaining

7.07 Years

Average Price

$2,955,131

Lowest Cap Rate

3.00%

Highest Cap Rate

7.00%

2015

2016

5.20%

5.65%

9.82 Years

6.77 Years

$4,434,007

$2,990,523

Transactions Average Cap Rate Average Term Remaining Average Price

Founded in 1874, Bank of America is based in Charlotte, North Carolina. Through their subsidiaries, the Bank provides banking and financial products and services to individual consumers, small and middlemarket businesses, institutional investors, large corporations, and governments worldwide. The bank’s core services include consumer and small business banking, corporate banking, credit cards, mortgage lending, and asset management. Its online banking operation counts some 33 million active users and 20 million-plus mobile users. Their global reach covers the U.S., Canada, the Asia-Pacific region, Europe, the Middle East, Africa and Latin America. Bank of America has made moves in expanding its payment and card product lines across the globe as part of a multi-year growth strategy. Thanks largely to its acquisition of Merrill Lynch, Bank of America is also one of the world’s leading wealth managers with more than $2 trillion assets under management.

Recent Sales Comparables City

State

Sales Price

Cap Rate

San Jose

$6,571,429

5.25%

Niantic

$2,250,000

Memphis

Kissimmee

Year Built

Sale Date

5 years

1971

12/30/16

6.89%

6 years

1950

11/18/16

$1,450,000

6.75%

6.75 years

1972

8/16/16

$2,999,000

5.00%

8 years

2004

1/13/16

Bolingbrook

$3,475,000

7.12%

5.75 years

2003

7/24/15

Syosset

$12,000,000

3.94%

15 years

2016

6/11/15

Saugus

$4,930,000

6.50%

9 years

2008

4/3/15

Houston

$2,090,000

5.00%

14 years

2009

2/4/15

Sun City

$1,260,000

7.05%

3 years

4/22/06

typical Lease structure signed

C a p R at e C o r r e l at i o n

C a p R at e

Term Remaining

2.5

7.5

12.5

17.5

Lease Type

Rent Increase

NNN/ Ground Lease

10% every 5 years

Rent

Typical SF

$200,000

± 2,500 - 6,000SF

Lease Term

Average Deposits

15-20 years

$95.21 M

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 5 7

OVERVIEW Key Statistics Credit Rating

B+

Market Cap

$13.15B

# of Locations

Burger King operates the world’s #3 hamburger chain by sales with over 15,000 restaurants in the US and more than 100 other countries. In addition to their popular Whopper sandwich, the chain offers a selection of burgers, chicken sandwiches, salads, and breakfast items, along with beverages, desserts, and sides. Many of the eateries are stand-alone locations offering dine-in seating and drive-through services; the chain also includes units in high-traffic areas such as airports and shopping malls. Burger King is owned and operated by Restaurant Brands International.

15,738

Headquarters

Miami, FL

Cap Rate Comparison New Construction (15-20 years)

5.75%

10 Years Remaining

6.50%

5 Years Remaining

7.50%

Current on Market Data # of Properties

±111

Average Cap Rate

6.01%

Average Lease Term Remaining

13 years

Average Price

Like most other giants of the fast-food industry, Burger King has expanded its nationwide and international presence primarily through franchising. But the company has reduced its domestic expansion efforts recently. Burger King has been remodeling outdated restaurant interiors and modernizing obsolete technology, thus positioning the company for future growth. Its goal is to have most of the Burger King restaurants in the US and Canada on a modern image by the end of 2020. The company has also been steadily re-franchising locations with the goal of getting to a 100% franchised business model eventually.

$1,685,262

10%

Lowest Cap Rate

4.65%

Highest Cap Rate

10%

2015

2016

146

176

6.23%

6.16%

15 years

14 years

$1,467,056

$1,634,699

Average Cap Rate Average Term Remaining Average Price

C a p R at e

Transactions

C a p r at e c o r r e l at i o n

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Lease Type NNN

Lease Term 20 years

Rent

Typical SF

$90,000

± 3,000 SF

Rent Increase

Average Sales

10% every 5 years

$1,250,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Port Arthur

$1,405,000

6.50%

10 years

1978

1/6/17

Knoxville

$1,625,000

6.00%

20 years

1986

7/12/16

Gainesville

$1,330,000

5.86%

19 years

1993

5/10/16

Indio

$2,150,000

5.00%

20 years

2004

1/22/16

Swainsboro

$2,047,000

6.40%

17 years

2001

8/15/15

Portage

$1,540,000

6.00%

15 years

2005

7/29/15

Fairmont

$2,700,000

6.63%

18 years

1996

6/30/15

Lexington

$1,460,870

5.75%

20 years

2015

5/28/15

Muskego

$1,285,000

7.00%

10 years

2015

3/10/15

San Antonio

$2,202,000

6.00%

17 years

1995

2/3/15

5 8 | M AT T H E W S T M M AY 2 0 1 7

Term Remaining

Year Built

Sale Date

overview Key Statistics Credit Rating

B-

Market Cap

$693.35M

# of Locations

± 1,385

Headquarters

Nashville, TN

Cap Rate Comparison New Construction (20 years)

4.75%

10 Years Remaining

5.60%

5 Years Remaining

6.15%

Current on Market Data # of Properties

Founded in 1941 by Carl Karcher, Carl’s Jr. soon transformed from a hotdog cart to over 1200 locations. Carl’s Jr. is Quick Service Restaurant concept that operates primarily in the Western and Southwestern United States. The quality of the hamburger increased the popularity of the brand, which caused a demand for more stores. In 2017, Entrepreneur listed Carl’s Jr. as #29 on their Top Franchise 500 list, which ranks overall financial strength, stability, and growth rate for the top 500 franchisees in any field across the United States.

±12

Average Cap Rate

5.99%

Average Lease Term Remaining

14.86 years

Average Price

$2,537,230

Lowest Cap Rate

5.00%

Highest Cap Rate

9.00%

2015

2016

5.60%

5.46%

16 years

12.3 years

$2,474,285

$2,310,319

Transactions Average Cap Rate Average Term Remaining Average Price

Now a household name, the company incorporated as CKE Restaurants in 1966. Today, CKE Restaurants Inc. is the parent company of the Carl’s Jr., Hardee’s, Green Burrito, and Red Burrito brands. CKE Restaurants has been a powerhouse in its industry since its conception. The privately-held company has produced over a billion dollars in revenue in 7 of the last 9 years. Proudly employing roughly 20,000 people, CKE plays a vital role in this nation’s community. CKE’s most effective annual fundraiser, Stars for Heroes, has raised over $5 million for U.S military veterans and their families.

Recent Sales Comparables City

State

Sales Price

Tempe

$2,200,000

Tustin

$4,300,000

Fresno

$1,550,000

Firestone

$2,150,000

Las Vegas

Bennett

Cap Rate

Term Remaining

5.75%

Year Built

Sale Date

20 Years

1987

4.42%

15 Years

1991

2/3/17

5.40%

10 Years

1996

11/18/16

6.42%

8 Years

2004

11/8/16

$2,400,000

5.60%

15 Years

1994

10/6/16

$2,600,000

5.70%

20 Years

2016

9/21/16

Stockton

$1,200,000

6.11%

3 Years

N/A

7/22/16

Arroyo Grande

$1,500,000

5.20%

5 Years

N/A

6/8/16

Denver

$2,560,000

5.50%

12 Years

2007

4/1/16

Norco

$1,200,000

4.40%

New Lease

1978

3/25/16

typical Lease structure signed

C a p r at e c o r r e l at i o n

Lease Type

6.5%

C a p R at e

3/16/17

NNN

Rent Increase

10% every 5 years

Rent

5.5%

$120,000

Typical SF

± 2,900 SF

4.5%

2.5

7.5

12.5

17.5

Lease Term 20 years

Average Sales

$1,470,000

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 5 9

OVERVIEW Key Statistics Credit Rating

A+

Market Cap

$306B

# of Locations

±5,200

Headquarters

Chicago, IL

Cap Rate Comparison New Construction (15 years)

4.15%

10 Years Remaining

4.75%

5 Years Remaining

5.25%

Current on Market Data # of Properties

±16

Average Cap Rate

4.92%

Average Lease Term Remaining

9.19 years

Average Price

JPMorgan Chase & Co. is one of the oldest financial institutions in the United States, as well as one of the most respected financial institutions in the world. The current JPMorgan Chase is the result of the combination of several large U.S. banking companies merging over the last decade of which included Chase Manhattan Bank, J.P. Morgan & Co., Bank One, Bear Stearns and Washington Mutual. JPMorgan Chase has assets of $2.5 trillion and operations in more than 100 countries. They are the neighborhood bank for thousands of communities across the country. The company serves approximately one of out of every six Americans through more than 5,200 bank branches; 16,000 ATMs; mortgage offices; online and mobile banking; as well as relationships with auto dealerships, schools, and universities. JPMorgan Chase has over 240,000 employees. As of December 31, 2016, JPMorgan Chase & Co. had total revenue of $90.3 billion, a net income of $24.7 billion and a net worth of $254.1 billion. The company currently holds an A+/Stable rating with Standard & Poor’s. JPMorgan Chase has over 240,000 employees.

$3,125,645

Lowest Cap Rate

3.75%

Highest Cap Rate

12.21%

C a p r at e c o r r e l at i o n

2015

2016

4.94%

5.01%

13.91 years

10.23 years

$3,373,305

$3,631,960

Average Cap Rate Average Term Remaining Average Price

C a p R at e

Transactions

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed

Typical Square Feet

Lease Type

Rent

NNN

$117,500

± 4,000 - 4,500 SF

Rent Increase

Average Deposits

Lease Term

10% every 5 years

20 years

$40 M

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

San Francisco

New Lenox

$8,650,000

3.71%

5 years

1977

2/28/17

$4,111,250

4.00%

5 years

2011

2/1/17

Columbus

$3,332,354

4.13%

5 years

2007

12/20/16

Marana

$2,850,000

5.00%

5 years

2009

11/30/16

Sacramento

$2,525,000

5.69%

5 years

2007

10/21/16

Plantation

$5,600,000

4.50%

5 years

1998

6/17/16

Nanuet

$4,850,000

6.00%

N/A

1965

6/3/16

Saginaw

$1,062,500

4.87%

5 years

1976

5/31/16

Oceanside

$4,725,000

4.60%

4 years

1965

5/20/16

Saginaw

$1,062,500

4.87%

5 years

1976

5/31/16

6 0 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

N/A

Market Cap

N/A

# of Locations

±2,000

Headquarters

Atlanta, GA

Well known for their popular slogan, “Eat Mor Chickin” featured throughout their prominent ad campaigns, Chick-fil-A has become a favorite among chicken consumers. With over 2000 units in 35 states, Chick-fil-A Inc. is the third largest fast food chain in the nation, specializing in chicken. The first Chick-fil-A restaurant opened in 1967 outside Atlanta with the intent to focus on chicken. Today, the chain still remains famous for their hand breaded chicken breast fillet sandwich created by the founder, Truett Cathy. Staying true to their core values as a family run business with a focus on people, Cathy has built Chick-fil-A into a firm worth an estimated $1 billion.

Cap Rate Comparison New Construction (15 years)

4.00%

10 Years Remaining

4.50%

5 Years Remaining

4.75%

Current on Market Data # of Properties

±16

Average Cap Rate

4.00%

Average Lease Term Remaining

17 years

Average Price

Proven by the fact that Chick-fil-A maintains a franchisee turnover rate of less than 5% per year, the company is well recognized for their strong franchise operators. Only 0.4% of applicants who apply every year are accepted. Store locations and developments are chosen based on corporate goals for target markets usually in high traffic areas and near shopping centers. This corporate guarantee is reassuring for net lease investors.

$3,100,000

Lowest Cap Rate

3.75%

Highest Cap Rate

4.57%

2015

2016

4.57%

4.15%

20 years

$3,000,000

$3,500,000

Transactions Average Cap Rate Average Term Remaining Average Price

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

$3,090,000

4.13%

20 years

2016

9/21/16

Atlanta

$4,750,000

4.00%

20 years

2015

1/12/16

Winchester

$3,000,000

4.10%

12 years

2008

1/1/16

Albuquerque

$2,050,000

4.15%

20 years

2016

12/1/15

West Palm Beach

$2,725,000

4.00%

12 years

2007

9/1/15

Ocala

$2,300,000

4.91%

11 years

2011

10/16/14

Williamsburg

$1,925,000

4.57%

6 years

2006

9/12/14

Countryside

typical Lease structure signed

C a p r at e c o r r e l at i o n

C a p R at e

Lease Type NNN

4.5

Rent Increase 10% every 5 years

Rent $126,000

Typical SF ± 4,500 SF

Lease Term 5

15-20 years

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 6 1

Chipotle is one of the most recognizable fast-casual brands in the US. Founded in 1993, the company has grown to over 2,200 locations and has a market cap exceeding $14 Billion over the last 23 years. Blending the concepts of casual dining and quick-service restaurants, the company has become a household name, considered a trailblazer in the fast-casual industry.

overview Key Statistics Credit Rating

N/A

Market Cap

$14.38B

# of Locations

±2,227

Headquarters

Denver, CO

Cap Rate Comparison New Construction (15 years)

4.78%

10 Years Remaining

5.32%

5 Years Remaining

5.75%

Current on Market Data # of Properties

±7

Average Cap Rate

4.70%

Average Lease Term Remaining

11 Years

Founded by Steve Ells who still plays a central role in the company’s expansion, Chipotle is headquartered in Denver, Colorado. With over 45,000 employees across the US, the number of locations is steadily expanding by an average of 12% per year. Chipotle restaurants are mostly located in-line, and the company expansion plans to incorporate both new and existing markets.

$1,824,511

Lowest Cap Rate

4.25%

Highest Cap Rate

5.50%

2015

2016

5.09%

5.14%

13 Years

9 Years

$2,001,666

$1,910,276

Transactions Average Cap Rate Average Term Remaining

6.5%

C a p r at e c o r r e l at i o n 6%

5.5%

C a p R at e

Average Price

The company has devoted their brand to bringing customers quality ingredients from responsible vendors. Food With Integrity is Chipotle’s campaign and commitment to maintaining respect for animals, farmers and the environment. The company uses high-quality raw ingredients and classic cooking techniques to provide customers with an affordable, convenient, and quality dining option.

4.5%

Average Price

2.5

5.5

8.5

11.5

14.5

Years remaining on lease

typical Lease structure signed Lease Type

Typical SF

Rent

NN, NNN, GL

± 2200-2800 SF

$ 95,959

Lease Term 8 - 15 Years

Rent Increase

Average Sales

5% - 12% every 5

$1.73MM

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

$2,763,000

5.00%

N/A

1994

6/28/16

Phoenix

$2,551,000

4.90%

10 years

1995

12/30/16

Lacey

$2,176,260

N/A

2015

2/23/16

Ukiah

$2,125,000

4.23%

10 years

2016

12/22/16

Indiana

$1,800,000

5.10%

10 years

N/A

12/20/16

Conway

$1,715,000

5.24%

14 years

2016

6/24/16

Bexley

$1,700,000

4.65%

8 years

1998

12/21/16

Circleville

$1,635,000

5.00%

10 years

2016

12/12/16

Indianapolis

$1,325,000

5.75%

2 years

2004

11/2/16

Plainfield

$1,312,500

6.47%

10 years

2016

12/1/16

Fredericksburg

6 2 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

BBB/Baa2

Market Cap

$35.19B

# of Locations

±8.000+

Headquarters

Tempe, AZ

Circle K is an international chain of convenience stores, founded in 1951 in El Paso, Texas, United States. It is owned and operated by the Canadian-based Alimentation Couche-Tard. As the third-largest convenience store chain in the United States and the largest operator of company-owned convenience stores, Circle K has been a successful convenience store operator for over 50 years. Through the 85 percent of Circle K stores that offer gasoline, the company has become a major marketer of gasoline. More than 1,000 Tosco gasoline stations merged into Circle K following its purchase by Tosco.

Cap Rate Comparison New Construction (15 years)

5.75%

10 Years Remaining

6.25%

5 Years Remaining

7.25%

Current on Market Data # of Properties

±10

Average Cap Rate

5.80%

Average Lease Term Remaining

9.35 years

Average Price

In May of 2015 through its acquisition of The Pantry, Circle K purchased over 1,500 stores. Together, Circle K operates a retail system of over 4,000 outlets in 34 states. In addition to these, there are also about 900 Circle K stores--operated via joint ventures or licensing agreements-in more than 50 other countries, notably Canada, Taiwan, Korea, Hong Kong, New Zealand, Mexico, and Argentina. Circle K stores feature award-winning Premium Circle K Coffee, the Polar Pop cup, beer, snacks, candy, ATMs, Circle K Gift Cards, money orders, and much more.

$2,603,055

Lowest Cap Rate

4.60%

Highest Cap Rate

7.00%

2015

2016

6.64%

7.03%

7 years

5.16 years

$1,938,502

$1,464,646

Transactions Average Cap Rate Average Term Remaining Average Price

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Bloomington

$3,626,000

5.40%

15 years

1998

1/19/17

Montgomery

$2,462,500

6.15%

7 years

2004

12/22/16

Decatur

$3,392,500

5.70%

15 years

1987

10/26/16

Phoenix

$1,055,000

6.09%

10 years

1987

9/2/16

Cedar Park

$2,800,000

6.54%

5 years

2010

8/3/16

Las Cruces

$2,500,000

6.61%

6 years

2008

7/18/16

Marana

$4,315,000

5.75%

14 years

2008

7/15/15

Atwater

$2,030,000

6.50%

15 years

2015

5/15/15

Tucson

$4,207,000

5.76%

9 years

2009

3/31/15

Tucson

$4,382,610

5.75%

15 years

2002

6/27/14

typical Lease structure signed

C a p r at e c o r r e l at i o n

C a p R at e

Lease Type

Rent Increase

NNN

5-10%

Rent

Typical SF

$90,000

± 2,000 - 4,500 SF

Lease Term

Average Sales

1.5

4.5

7.5

10.5

13.5

15 -17 years

$1,500,000

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 6 3

overview Key Statistics Credit Rating

Baa1 / BBB+

Market Cap

$78.98B

# of Locations

± 9,600

Founded in 1892, CVS Health Corporation, together with its subsidiaries, provides integrated pharmacy health care services. Headquartered in Woonsocket, Rhode Island, the company operates through Pharmacy Services and Retail segments. As of December 31, 2016, CVS had almost 10,000 retail specialty pharmacy store and infusion branches locations across 49 states. The stores are known for selling prescription drugs, over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, seasonal merchandise, and greeting cards, as well as offers photo finishing services.

Headquarters

Woonsocket, RI

Average Lease Term Remaining

13.52 years

Expanding into more specialty fields of the fast-growing healthcare market, CVS continues to evolve from being a general pharmacy store. CVS has been successful in its ventures for its store count has increased from 7,388 stores at the end of 2011 to nearly 10,000 stores today. In addition to opening new stores, CVS has made efforts to increase sales at existing ones. Prescription drugs account for more than two-thirds of its sales, and the retailer is attempting to grow revenues from over-the-counter medications and general merchandise through its growing private-label product offering.

Average Price

$4,463,034

Cap Rate Comparison New Construction (25 years)

5.15%

10 Years Remaining

6.50%

5 Years Remaining

7.20%

Current on Market Data # of Properties

±70

Average Cap Rate

6.22%

Lowest Cap Rate

4.85%

Highest Cap Rate

9.09%

cvs

2015

2016

172

197

5.95%

6.02%

Average Term Remaining

13.27 years

13.84 years

Average Price

$5,197,809

$5,241,135

Transactions Average Cap Rate

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Edmond

$4,130,000

7.00%

7 years

2003

12/28/17

Montgomery

$8,975,000

4.85%

25 years

2015

12/16/16

Spring Hill

$4,700,000

6.80%

3 years

2000

11/7/16

Killeen

$4,420,000

5.10%

25 years

2014

10/14/16

Richmond

$6,200,000

5.75%

17.5 years

2008

8/19/16

Alpharetta

$4,225,000

6.90%

5 years

2001

8/19/16

Tustin

$8,100,000

4.85%

10 years

1974

8/3/16

Peoria

$2,961,562

8.00%

2.5 years

1998

6/30/16

Mauldin

$2,500,000

7.27%

2 years

1997

4/8/16

Laconia

$9,175,575

5.65%

19 years

2009

1/20/16

typical Lease structure signed

C a p r at e c o r r e l at i o n

C a p R at e

Lease Type

Rent Increase

Rent

Typical SF

$300,000

± 13,000 SF

Lease Term

Average Sales

NNN

In options only

2.5

7.5

12.5

17.5

Years remaining on lease

6 4 | M AT T H E W S T M M AY 2 0 1 7

22.5

25 years

Typically do not report

overview Key Statistics Credit Rating

BB | Ba3

Market Cap

$13.05B

# of Locations

±2,350

Headquarters

Denver, CO

DaVita Inc., a Fortune 500® company, is the parent company of DaVita Kidney Care and HealthCare Partners, a DaVita Medical Group. DaVita Kidney Care is a leading provider of kidney care in the United States, delivering dialysis services to patients with chronic kidney failure and end stage renal disease. DaVita Kidney Care consistently differentiates itself from other kidney care companies and surpasses national averages for clinical outcomes.

Cap Rate Comparison New Construction (15 years)

5.50%

10 Years Remaining

6.67%

5 Years Remaining

7.67%

Current on Market Data # of Properties

±28

Average Cap Rate

The company's clinical outcomes for dialysis have improved for the past decade, and in many key areas measuring quality dialysis care, lead the nation. As of December 31, 2016, DaVita Kidney Care operated or provided administrative services at 2,350 outpatient dialysis centers located in the United States serving approximately 188,000 patients. Fortune, Modern Healthcare, Newsweek and WorldBlue have all recognized DaVita's leadership development initiatives and social responsibility efforts.

6.04%

Average Lease Term Remaining

9.26 years

Average Price

$4,225,349

Lowest Cap Rate

5.00%

Highest Cap Rate

7.93%

2015

2016

6.89%

7.16%

7.5 years

8.5 years

$6,320,000

$2,790,270

Transactions Average Cap Rate Average Term Remaining Average Price

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Deerfield

$1,875,000

5.50%

5 years

2007

3/31/17

Hopkinsville

$1,175,000

7.10%

6 years

2001

2/28/17

Evans

$3,157,830

6.15%

15 years

2016

2/9/17

Edenton

$2,376,210

5.50%

15 years

2014

11/30/16

San Antionio

$3,625,000

6.25%

9 years

1984

11/11/16

Memphis

$1,252,000

6.75%

8.25 years

2002

10/25/16

Somerset

$2,668,000

6.00%

15 years

2002

9/16/16

Freeport

$2,595,000

6.00%

10 years

2001

9/2/16

Nampa

$2,195,000

6.65%

7 years

1996

7/20/16

Westland

$3,013,000

6.61%

9 years

1966

7/11/16

typical Lease structure signed

10%

C a p r at e c o r r e l at i o n C a p R at e

Lease Type

Rent Increase

1-2% or 10% every 5 years

Rent

Typical SF

$177,500

± 8,000 SF

Lease Term 5%

1.5

4.5

7.5

10.5

13.5

15 years

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 6 5

OVERVIEW Key Statistics Credit Rating

Market Cap

$874.31M

# of Locations

±1,710

Headquarters

Spartanbrug, SC

Cap Rate Comparison New Construction (15 years)

5.75%

10 Years Remaining

6.75%

5 Years Remaining

7.25%

Current on Market Data # of Properties

±14

Average Cap Rate

Founded in 1953 and headquartered in Spartanburg, South Carolina, Denny’s, Inc., owns and operates full-service restaurant chains under the Denny’s brand. As of December 28, 2016, Denny’s operated over 1,700 franchised, licensed, and company-operated restaurants in the United States and worldwide and is still expanding. Denny’s is pushing their reach by opening up locations with a slightly smaller format and focusing largely on the Midwest states. Marketing themselves as a family-friendly casual dining restaurant, Denny's features good value and quality food items to their customers. They rely heavily on discounted price offers and limited-time menu offerings to help drive traffic to their restaurants. Denny’s has thrived by stressing value through effective marketing and national advertising campaigns.

5.85%

Average Lease Term Remaining

±15.50 Years

Average Price

10%

$2,029,065

Highest Cap Rate

7.74%

2015

2016

6.92%

6.07%

±15 Years

±18 Years

$1,688,987

$2,063,638

Transactions Average Cap Rate Average Term Remaining Average Price

C a p r at e c o r r e l at i o n

4.25% C a p R at e

Lowest Cap Rate

2.5

7.5

12.5

17.5

Years remaining on lease

Typical Lease Structure Rent

Lease Type NNN

$120,000 - $200,000

Lease Term

Rent Increase

15 years

Typical SF ±4,500 SF

Average Sales $1,700,000

10% every 5 years

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Snellville

$2,050,000

6.25%

20 years

1987

10/26/16

Spartanburg

$2,000,000

6.00%

20 years

1987

12/7/16

Apple Valley

$2,700,000

5.20%

15 years

2008

11/18/16

St. Robert

$1,894,230

6.25%

20 years

2014

8/8/16

Lithonia

$2,075,000

6.25%

20 years

2004

4/6/17

McAllen

$3,917,500

6.15%

15 years

1993

12/29/16

Lynwood

$4,100,000

5.22%

13 years

2000

2/9/17

$2,312,500

6.25%

12 years

1993

3/28/17

Warrenton

Indianapolis

$1,500,000

6.55%

12 years

1998

2/10/16

Queen Creek

$3,075,000

5.15%

20 years

2016

6/30/16

6 6 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

BBB

Market Cap

$19.15B

# of Locations

±13,320

Headquarters

Goodlettsville, TN

Cap Rate Comparison New Construction (15 years)

6.45%

10 Years Remaining

7.35%

5 Years Remaining

8.50%

Current on Market Data # of Properties

±333

Average Cap Rate

Dollar General Corporation offers a selection of merchandise, including consumables, seasonal, home products and apparel. The Company operates over 12,575 stores in over 43 states, with majority concentration of stores located in the southern, southwestern, midwestern and eastern United States. Its merchandise includes national brands from manufacturers, as well as private brand selections. The Company offers its merchandise through its smallbox locations with average stores at approximately 7,400 square feet of selling space. Its stores are supported by over 13 distribution centers located strategically throughout its geographic footprint. The Company competes with Family Dollar, Dollar Tree, Fred's, 99 Cents Only, Walmart, Target, Kroger, Aldi, Walgreens, CVS and Rite Aid. (Source: Reuters)

7.34%

Average Price

$1,142,225

Lowest Cap Rate

5.75%

Highest Cap Rate

14.00%

C a p r at e c o r r e l at i o n 9%

2015

2016

497

522

7.17%

7.07%

9.6 Years

8.5 Years

$1,187,934

$1,244,687

Transactions Average Cap Rate Average Term Remaining Average Price

10%

±10 Years C a p R at e

Average Lease Term Remaining

1.5

4.5

7.5

10.5

13.5

Years remaining on lease

typical Lease structure signed Rent

Lease Type

Typical SF

$ 81,143

NN or NNN

±9,100 SF

Rent Increase

Lease Term

Average Sales

10% in option periods or 3% in year 11

10 or 15 years

±$1,600,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Houston

$1,767,495

6.15%

15 years

2017

1/24/17

Blairsville

$770,000

8.42%

4 years

2005

10/31/16

Leighton

$1,020,176

6.80%

14 years

2016

10/7/16

Concord

$1,065,000

6.50%

15 years

2016

8/22/16

Sycamore

$1,020,000

6.50%

15 years

2016

8/12/16

Selma

$749,000

8.09%

7 years

2008

6/8/16

Trinity

$1,405,000

6.35%

14 years

2016

3/9/16

Seymour

$775,000

8.73%

4 years

2004

7/17/15

Pascagoula

$1,196,000

7.25%

9 years

2009

2/17/15

Tyrone

$644,000

8.20%

6 years

2005

7/9/14

M AT T H E W S T M M AY 2 0 1 7 | 6 7

With more than 19,000 points of distribution in nearly 60 countries worldwide, Dunkin' Brands Group, Inc. is one of the world's leading franchisors of quick service restaurants serving hot and cold coffee, baked goods, and hard-serve ice cream. At the end of the third quarter of 2015, Dunkin' Brands' nearly 100 percent franchised business model included more than 11,500 Dunkin' Donuts restaurants and more than 7,600 Baskin-Robbins restaurants.

overview Key Statistics Credit Rating

N/A

Market Cap

$4.88B

# of Locations

± 11,300

Headquarters

Canton, MA

Founded in 1945 in Glendale, Calif., Baskin-Robbins is the world’s #1 ice cream franchise serving premium ice cream, specialty frozen desserts, and beverages to more than 300 million customers each year.

Cap Rate Comparison 10 Years Remaining

5.55%

5 Years Remaining

7.50%

Current on Market Data # of Properties

±22

Average Cap Rate

5.44%

Average Lease Term Remaining

12 years $1,465,173

Lowest Cap Rate

4.25%

Highest Cap Rate

6.00%

C a p R at e

Average Price

2015

2016

5.78%

5.55%

Average Term Remaining

13.5 years

Average Price

$1,156,987

$1,239,399

Transactions Average Cap Rate

C a p r at e c o r r e l at i o n

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Rent

Typical Square Feet

$85,000

± 2,300 SF

Lease Term

Rent Increase

Average Sales

15-20 years

10% every 5 years

$1,000,000

Lease Type NNN

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Buford

$1,860,000

5.50

15 Years

2016

12/16/16

Mableton

$1,010,000

5.00

19 Years

2016

10/20/16

Phoenix

$1,815,000

4.56

10 Years

2014

10/10/16

Tampa

$1,550,000

5.13

10 Years

2015

2/8/16

Roseville

$3,175,000

4.72

12 Years

2015

1/20/16

Pueblo

$1,640,000

6.00

10 Years

2007

12/22/15

Jacksonville

$2,181,818

5.50

19 Years

2006

12/15/15

League City

$1,248,000

6.25

10 Years

2014

11/20/15

New Hartford

$1,060,000

6.99

11 Years

2005

6/11/15

Naperville

$2,277,000

5.50

20 Years

2003

11/21/14

6 8 | M AT T H E W S T M M AY 2 0 1 7

Family Dollar Stores, Inc. operates a chain of retail stores offering a range of merchandise from household cleaners to name brand foods, from health and beauty aids to toys, and from apparel for every age to home fashions.

Overview Key Statistics

The Company has approximately 10 distribution centers for its supply chain management and over 8,000 stores within its approximately 50 state operating area. The average size of a Family Dollar store is approximately 7,000 square feet, and most stores are operated in leased facilities. This relatively small footprint allows the Company to open new stores in rural areas and small town, as well as in large urban neighborhoods. Within these markets, the stores are located in shopping centers or as free-standing building and all are convenient to the Company’s customer base.

Credit Rating

BB+

Market Cap

$18.19B

# of Locations

± 8,000

Headquarters

Charlotte, NC

Cap Rate Comparison

The Company's subsidiary, Family Dollar Trucking, Inc., services Family Dollar Stores located in southeastern states with localized operations at the corporate fleet offices. (Source: Family Dollar)

New Construction (15 years)

6.36%

10 Years Remaining

7.46%

5 Years Remaining

8.75%

Current on Market Data # of Properties

±187

Average Cap Rate

7.37%

Average Lease Term Remaining

10%

Average Price

C a p r at e c o r r e l at i o n

$1,240,187

Lowest Cap Rate

5.00%

Highest Cap Rate

12.00%

C a p R at e

2015

2016

217

239

7.31%

7.11%

± 9 Years

± 10 Years

$1,323,164

$1,360,436

Transactions

Average Cap Rate

Average Term Remaining 5%

± 9 Years

1.5

4.5

7.5

10.5

13.5

Average Price

Years remaining on lease

typical Lease structure signed Rent

Typical Square Feet

NN or NNN

$105,000

±8,320 SF

Lease Term

Rent Increase

Average Sales

Lease Type

Flat 10% after yearly or CPI based every 3 years

10 or 15 years years

± $1,300,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

$857,500

9.31%

3.5 years

1970

12/16/17

Norwich

$2,100,000

6.27%

15 years

2017

3/9/17

Covington

$1,685,100

6.25%

15 years

2017

2/27/17

Harrisville

$595,000

8.50%

4 years

2006

2/6/17

Orlando

$1,850,000

8.43%

3 years

2010

1/25/17

Medina

$1,666,446

6.50%

15 years

2016

11/22/16

Keystone Heights

$1,615,000

6.13%

15 years

2016

4/29/16

Augusta

$1,490,000

6.35%

15 years

2016

4/25/16

Reno

$1,960,000

6.96%

7.5 years

2013

1/29/15

Littleton

$825,000

8.90%

3 years

2007

4/30/14

Calumet Park

M AT T H E W S T M M AY 2 0 1 7 | 6 9

Key Statistics Credit Rating

BBB-

Market Cap

$32.95B

# of Locations

±1,600

Headquarters

Akron, OH

Cap Rate Comparison New Construction (15 years)

5.90%

10 Years Remaining

6.72%

5 Years Remaining

7.03%

Current on Market Data # of Properties

±4

Average Cap Rate

6.59%

Average Lease Term Remaining

11 years

Average Price

$3,289,452

Lowest Cap Rate

5.00%

Highest Cap Rate

9.00%

2015

2016

6.67%

7.00%

7 years

8 years

$2,820,029

$2,135,000

Transactions Average Cap Rate Average Term Remaining Average Price

Bridgestone/Firestone Americas Holding, Inc., a subsidiary of Bridgestone Corporation, is an international manufacturer with 38 production facilities throughout the Americas. The Nashville, Tennessee based company was formed in 1990 when Bridgestone U.S.A. merged with The Firestone Tire & Rubber Company. The North American subsidiary of Bridgestone Corp., Bridgestone/Firestone makes Bridgestone, Firestone, Dayton, and private-brand tires. 10% Firestone Complete Auto Care) (Source: 9%

C a p R at e C o r r e l at i o n

C a p R at e

Overview

Since 1926, drivers have trusted Firestone Complete Auto Care to keep their vehicles running well. As America’s auto care needs have evolved, so has Firestone. Firestone Complete Auto Care is the leading provider of maintenance, repairs and tires for a reason: because they believe in offering a total auto care experience that perfectly meets customer’s needs. The company’s auto care advisors and service technicians take pride in understanding each customer’s vehicle from bumper to bumper. They back their services and repairs with a nationwide warranty that’s good at each of their more than 1,700 convenient store locations.

1.5

4.5

7.5

10.5

13.5

Years remaining on lease

typical Lease structure signed Lease Type NNN

Lease Term

Rent

Typical SF

$124,832

± 8,000 SF

Average Sales

Rent Increase

15 years

10% every 5 years

$1,500,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

West Springfield

$2,157,000

7.25%

11 years

1948

10/6/16

Waterbury

$843,000

7.25%

5 years

1976

7/16/16

Lexington

$715,000

6.08%

9 years

1967

5/9/16

Reading

$1,120,000

5.90%

11 years

1920

4/18/16

Cary

$1,900,000

5.01%

13 years

2011

12/30/15

Fort Wayne

$2,077,177

6.74%

5 years

2005

6/2/15

Waxahachie

$2,311,000

7.97%

9 years

2012

3/3/15

Sarasota

$1,050,000

7.31%

5 years

1988

7/28/14

Hutto

$2,733,200

7.25%

8 years

2007

7/1/14

Chesterfield

$1,925,500

7.50%

8 years

2007

2/27/14

7 0 | M AT T H E W S T M M AY 2 0 1 7

OVERVIEW Key Statistics Credit Rating

BBB-

Market Cap

$25.19B

# of Locations

±2200

Headquarters

Bad Homburg, Germany

Fresenius Medical Care (FMC) is the world’s top provider of products and services for individuals that suffer from chronic kidney disease and failure. Fresenius cares for more than 300,000 patients around the globe and operates more than 3,600 clinics worldwide. Along with clinic operation, Fresenius runs 37 production sites on all continents that provide products such as dialysis machines dialyzers, and related disposables. Many of these products are used by other dialysis companies around the world.

Cap Rate Comparison New Construction (15 years)

6.00%

10 Years Remaining

6.50%

5 Years Remaining

7.25%

Current on Market Data # of Properties

±20

Average Cap Rate

7.04%

Average Lease Term Remaining

12 years

Average Price

The company’s strategy is geared toward sustainable long-term growth as they aim to continuously improve the quality of life of patients by offering innovative products and treatment concepts of the highest quality.

$2,467,430

Lowest Cap Rate

5.00%

Highest Cap Rate

9.25%

2015

2016

8.00%

7.20%

9 years

11 years

$2,900,000

$3,300,000

Transactions Average Cap Rate Average Term Remaining Average Price

Fresenius Medical Care’s corporate headquarters are in Bad Homburg, Germany. The headquarters of North America are in Waltham, Massachusetts and the headquarters of Asia-Pacific are located in Hong Kong.

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

$3,795,447

6.15%

15 years

2003

1/28/16

Grand Rapids

$2,700,000

10.00%

2 years

1998

10/14/15

Palmetto

$2,658,128

7.00%

7 years

2007

9/30/15

Carmichaels

$745,000

8.31%

10 years

2007

8/18/15

Victoria

$3,000,000

7.35%

8 years

2009

8/17/15

Fort Mill

$2,648,175

7.00%

9 years

2005

7/10/15

Hyattsville

$1,700,000

7.01%

10 years

2007

6/5/15

Baton Rouge

$1,875,000

7.75%

6 years

2009

5/18/15

Centerville

$1,488,000

8.25%

5 years

2007

4/22/15

Johnson City

$3,294,000

7.02%

8 years

2002

4/16/15

Vincennes

10%

typical Lease structure signed

Lease Type

C a p r at e c o r r e l at i o n

Rent Increase

10% every 5 years

Rent

Typical SF

C a p R at e

$194,038

± 9,000 SF

Lease Term 0

1.5

4.5

7.5

10.5

13.5

15 years

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 7 1

Goodyear is one of the most recognized brand names in the tire industry and represents one of the world’s leading tire companies with operations in most regions of the world. Goodyear primarily develops, manufactures, markets, and distributes tires for a wide array of consumers located throughout the world. Founded in 1898

overview

and headquartered in Akron, OH, Goodyear employs roughly 65,000 individuals that help market and manufacture 49 facilities in 22

Key Statistics Credit Rating

Market Cap

$8.86B

# of Locations

±1100

Headquarters

Akron, OH

Cap Rate Comparison

different countries. Being one of the largest operators of commercial truck service, Goodyear, operates in over 1,100 auto service center outlets nationwide offering its products for retail sales and providing automotive repair and other like-kind services. Goodyear focuses heavily on product

New Construction (15 years)

5.50%

innovation and technological advances to enable them to create

10 Years Remaining

6.50%

products and services that are valued and sought out by consumers,

5 Years Remaining

7.50%

customers, and investors. This helped set Goodyear apart from their competition by responding to the needs of an increasingly complex

Current on Market Data ±7

market. In 2015 alone, Goodyear was granted 669 new worldwide

7.39%

patents. Their innovations have been a huge factor leading to their

6 Years

global success as they continue to receive many awards for their

Average Cap Rate Average Lease Term Remaining Average Price

$1,800,000

Lowest Cap Rate

5.50%

Highest Cap Rate

8.00%

2015

2016

6.80%

7.09%

8.5 years

4.12 years

$1,930,000

$1,434,000

Transactions Average Cap Rate Average Term Remaining Average Price

innovations; in 2012 they were named a Thomson Reuters Top 100 Global Innovator company. 9%

C a p R at e C o r r e l at i o n

C a p R at e

# of Properties

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Lease Type

Rent

Typical SF

$175,000

Lease Term 15 years

± 5,500 - 7,500 SF

Rent Increase

Average Sales

10% every 5 years

$1,150,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Huntsville

Pearland

Eatontown

$4,363,000

5.75%

15 years

2016

1/31/17

$2,731,000

6.70%

5 years

2009

12/10/16

$1,570,000

6.43%

5 years

2000

4/27/16

Orange Park

$1,014,000

7.25%

4 years

1999

12/23/15

Easley

$3,500,000

6.00%

15 years

2015

9/9/15

Pooler

$2,606,000

7.50%

10 years

2008

7/1/15

St. Johns

$4,300,000

5.50%

20 years

2015

5/12/15

Savannah

$1,605,000

7.10%

3 years

2000

11/17/14

Forest

$1,189,000

7.75%

5 years

2001

3/10/14

Fredericksburg

$3,500,000

6.83%

15 years

2014

2/11/14

7 2 | M AT T H E W S T M M AY 2 0 1 7

Year Built

Sale Date

OVERVIEW Key Statistics Credit Rating

Market Cap

$1B

# of Locations

±1,700

Headquarters

Glendale, CA

IHOP, formally known as The International House of Pancakes, has been an American dining cornerstone since the restaurant chain started in 1958. IHOP restaurants offer an affordable, everyday dining

Cap Rate Comparison New Construction (15 years)

5.50%

10 Years Remaining

6.20%

5 Years Remaining

7.00%

experience with warm and friendly service offering a wide variety of breakfast, lunch and dinner options. Those options include IHOP’s world famous pancakes which continue

Current on Market Data

to be the hallmark of this thriving casual dining restaurant chain. IHOP

# of Properties Average Cap Rate Average Lease Term Remaining Average Price

±18

restaurants are franchised and operated by Glendale, California-based

6.05%

International House of Pancakes, LLC; a wholly-owned subsidiary of

11 Years

DineEquity, Inc., and its affiliates. DineEquity, Inc is one of the largest

$2,910,000

full-service restaurant companies in the world with more than 400

Lowest Cap Rate

4.50%

Highest Cap Rate

11.00%

HOP’s 99%-franchised system allows for strong free-cash flows and

2015

2016

of the stores are franchised, there are a few dozen corporate-run

6.00%

6.30%

locations whose primary purpose is testing and training. IHOP’s overall

13 years

11.5 years

$2,818,222

$2,550,425

Transactions Average Cap Rate Average Term Remaining Average Price

franchisee partners.

drives innovation in day-to-day store operations. While a vast majority

dedication to providing affordable family dining in a wholesome, relaxed environment has led to year over year store sale increases making IHOP one of the best casual dining investments in retail.

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Jonesboro

$2,757,000

5.50%

10 years

1984

3/7/17

Miami Beach

$3,631,300

4.15%

6 years

2008

11/2/16

Springfield

$3,624,000

5.85%

20 years

2016

9/7/16

Clemmons

$3,485,000

6.60%

11 years

2007

5/5/16

Orlando

$4,274,183

5.50%

8 years

1976

3/1/16

Albuquerque

$3,200,000

5.88%

12 years

2008

1/20/16

Venice

$4,076,870

4.95%

13.5 years

1999

7/15/15

Los Angeles

$6,725,000

3.69%

10 years

1968

6/16/15

Muncie

$2,730,000

6.85%

17 years

2002

5/29/15

Milledgeville

$1,750,000

8.23%

12 years

2006

3/30/15

10%

typical Lease structure signed 9%

C a p r at e c o r r e l at i o n

C a p R at e

Lease Type

NNN

Rent Increase

10-12% Every 5 Years

Rent 6%

2.5

7.5

12.5

Years remaining on lease

17.5

Typical SF

$157,500

± 4,000 - 5,100 SF

Lease Term

Average Sales

20-25 Years

$ 1,900,000

M AT T H E W S T M M AY 2 0 1 7 | 7 3

Founded in 1951, Jack in the Box Inc. operates and franchises Jack in the Box® restaurants and Qdoba Mexican Eats® restaurants. Headquartered in San Diego and employing more than 20,000 employees, Jack in the Box is a leader in both the quick-service and fast-casual spaces.

OVERVIEW Key Statistics Credit Rating

Not Rated

Market Cap

$3.24B

# of Locations

± 2255

Headquarters

San Diego, CA

Cap Rate Comparison New Construction (20 years)

4.85%

10 Years Remaining

5.48%

5 Years Remaining

6.21%

Current on Market Data # of Properties

±35

Average Cap Rate

Serving over half-billion guests annually, Jack in the Box has had a history of emphasizing and improving convenience. It was the hamburger chain to utilize and spread drive-thru service and is still one of the only quick service concepts to offer a full menu all day every day. With its top 10 markets comprising of 70% of its units, Jack in the Box restaurants are almost always accessible with most of its restaurants open 18-24 hours a day. As a hamburger chain at its core, hamburgers represent much of the Jack in the Box menu. With only 21 states out of 50 entered, Jack in the Box has huge potential for growth. As corporate continues to push forward in growth and increasing average unit volumes, Jack in the Box will continue to lead in the quick-service space.

5.03%

Average Lease Term Remaining

9 years

C a p r at e c o r r e l at i o n

$2,226,957

Lowest Cap Rate

3.50%

Highest Cap Rate

9.50%

2015

2016

5.37%

6.15%

8.33 years

9.17 years

$2,227,440

$2,095,516

Transactions Average Cap Rate Average Term Remaining Average Price

C a p R at e

Average Price

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Lease Type

Rent

Typical Square Feet

NNN

$129,528

± 2,500 SF

Average Sales

Rent Increase

Lease Term

10% every 5 years

20 years

$1,530,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Houston

$2,555,000

5.05%

10 years

1992

3/14/17

Long Beach

$1,950,000

3.87%

5 years

2004

2/17/17

Phoenix

$990,000

6.51%

4 years

1990

1/25/17

Garland

$1,980,000

6.75%

4 years

1997

1/9/17

Houston

$1,160,000

6.03%

4 years

1970

11/23/16

Houston

$1,580,000

5.41%

5 years

2003

11/8/16

Woodland Hills

$3,100,000

4.43%

6 years

1970

11/4/16

Carrollton

$2,150,000

5.42%

10 years

1984

10/20/16

Tustin

$3,225,000

4.26%

16 years

1968

9/13/16

Oklahoma City

$2,256,250

4.50%

17 years

2009

9/8/16

7 4 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

Market Cap

$220B*

# of Locations

± 2,000

Headquarters

Houston, TX

Cap Rate Comparison New lease (20 years)

5.50%

10 Years Remaining

6.75%

5 Years Remaining

7.50%

Current on Market Data # of Properties

±21 6.50%

Average Lease Term Remaining

10 Years

Average Price

$1,581,775

Lowest Cap Rate

4.75%

Highest Cap Rate

9.00%

2015

2016

7.30%

6.70%

10 years

12 years

$1,322,585

$1,437,900

Transactions Average Cap Rate Average Term Remaining Average Price

Headquartered in Houston, Texas, Jiffy Lube® International is a wholly owned, indirect subsidiary of Shell Oil Company. Jiffy Lube service centers are 100% franchise-owned. So, despite being a national corporation, each location is locally owned and operated.

*Corporate Backed Leases

Jiffy Lube® pioneered the fast oil change industry more than 35 years ago. Today, more than 20 million customers every year rely on Jiffy Lube to keep their vehicles running the way your vehicle manufacturer intended. It’s the mission of everyone at Jiffy Lube to go beyond oil changes alone, to help alleviate the anxiety that routine vehicle maintenance can bring. (Source: Jiffy Lube) 10%

C a p r at e c o r r e l at i o n

C a p R at e

Average Cap Rate

Jiffy Lube® is a leading provider of automotive preventive maintenance. With a national footprint of more than 2,000 franchisee-operated service centers across the country, Jiffy Lube offers a range of services from oil changes to tire rotations, and everything in between.

typical Lease structure signed

2.5

7.5

12.5

17.5

Years remaining on lease

Lease Type

Typical Square Feet

Rent

NNN

$140,000 New $80,000 Average

± 2,500 SF

Lease Term

Rent Increase

Average Sales

20 years

10% every 5 years

$700,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Garland

$2,695,000

5.75%

20 years

2016

8/29/16

Roy

$1,613,000

6.49%

10 years

2011

7/8/16

Milford

$1,305,000

7.75%

9 years

1990

6/23/16

Peyton

$1,350,000

7.53%

10 years

2005

6/22/16

Mansfield

$2,533,000

5.75%

20 years

2016

6/9/16

Ogden

$1,781,600

5.53%

15 years

2016

3/31/16

Austin

$1,819,841

6.91%

8 years

2004

1/20/16

Austin

$1,819,841

6.91%

8 years

2004

1/20/16

North Richland Hills

$2,525,752

5.65%

20 years

1998

10/14/15

Omaha

$1,338,000

6.50%

17 years

2012

7/30/15

M AT T H E W S T M M AY 2 0 1 7 | 7 5

OVERVIEW Key Statistics Credit Rating

Ba1

Market Cap

KFC, or Kentucky Fried Chicken, is a fast food restaurant chain that specializes in fried chicken. It is the world’s second largest restaurant chain (as measured by sales) after McDonald’s, with 18,875 outlets in 118 countries and territories as of December 2013. Since the early 1990s, KFC has expanded its menu to offer other chicken products such as chicken fillet burgers and wraps, as well as salads and side dishes, such as French fries and coleslaw, desserts, and soft drinks. The company is a subsidiary of Yum! Brands, a restaurant company that also owns the Pizza Hut and Taco Bell chains.

$22.59B

# of Locations

±4,270

Headquarters

Louisville, KY

Cap Rate Comparison New lease (20 years)

6.00%

10 Years Remaining

6.17%

5 Years Remaining

7.33%

Current on Market Data # of Properties

±51

Average Cap Rate

5.79%

Average Lease Term Remaining

16 years

Average Price

YUM! Brands, Inc. YUM! Brands, Inc., together with its subsidiaries, operates quick service restaurants. It operates in five segments: YUM China, YUM India, the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of August 18, 2015, it operated approximately 41,000 restaurants in approximately 125 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food.

$1,490,000

Highest Cap Rate

9.00%

2015

2016

6.02%

5.96%

Average Term Remaining

15.47 years

15.4 years

Average Price

$1,328,826

$1,425,797

Average Cap Rate

C a p R at e

3.73%

Transactions

C a p r at e c o r r e l at i o n

Lowest Cap Rate

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Rent

Typical Square Feet

$95,000

± 2,900 SF

Lease Term

Rent Increase

Average Sales

20 years

10% every 5 years

$1,000,000

Lease Type NNN

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Sallisaw

$1,323,000

6.53%

9 years

1971

9/13/16

Georgetown

$1,356,000

6.50%

12 years

1999

8/1/16

Milwaukee

$1,300,000

6.40%

12 years

1996

1/15/16

Lemont

$1,288,250

5.75%

20 years

2001

1/14/16

Bakersfield

$1,900,000

5.00%

20 years

2005

10/9/15

Columbia

$1,143,000

5.00%

20 years

2005

10/7/15

West Lebanon

$2,325,000

5.42%

20 years

1993

8/18/15

Birmingham

$943,625

7.00%

9 years

1989

6/18/15

Council Bluffs

$1,045,000

5.50%

20 years

1987

6/16/15

Pauls Valley

$1,900,000

8.00%

5 years

1999

5/5/14

7 6 | M AT T H E W S T M M AY 2 0 1 7

OVERVIEW Key Statistics Credit Rating

B+

Market Cap

$3.8B

# of Locations

± 3,600

Headquarters

Houston, TX

Cap Rate Comparison New Construction (15 years)

N/A

10 Years Remaining

6.65%

5 Years Remaining

7.50%

Current on Market Data # of Properties

±20

Average Cap Rate

6.91%

Average Lease Term Remaining

± 9.5 years

Average Price

$2,237,866

Lowest Cap Rate

6.20%

Highest Cap Rate

8.25%

2015

2016

6.69%

6.75%

10 years

$2,624,648

$2,368,698

Transactions Average Cap Rate Average Term Remaining Average Price

Mattress Firm is an American retailing company and mattress store chain founded in 1986 located in Houston, Texas. Mattress Firm is the nation’s leading specialty bedding retailer with over $3.5 billion in pro forma sales in 2015. The company has more than 3,600 companyoperated and franchised stores across 49 states with the largest geographic footprint in the United States among other multi-brand mattress retailers. The company set out to be a different kind of mattress retailer; focused on creating a unique shopping experience for the customer with a large selection of quality, brand name bedding products, competitive pricing and knowledgeable, well-trained associates. Mattress Firm has been aggressively expanding in recent history. In 2016, the company was acquired by Steinhoff International for $3.8 billion and continues to operate as a subsidiary. The company operates through its brands which include Mattress Firm, Sleepy’s, and Sleep Train. The company’s retail locations are either corporately guaranteed franchisees or company-owned and operated. Mattress Firm is one of the most highly demanded net lease investments. (Source: Mattress Firm)

typical Lease structure signed City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Los Banos

$2,655,000

6.25%

10 years

2017

3/30/17

Grand Junction

$3,582,000

6.70%

11 years

2016

2/8/17

Terr Haute

$2,125,000

7.35%

10 years

2016

1/18/17

Loveland

$2,730,000

6.20%

11 years

2016

12/9/16

Westchester

$1,950,000

6.75%

10 years

2016

12/1/16

Richmond

$2,335,000

6.85%

10 years

2016

11/29/16

Tallahassee

$2,163,400

6.50%

10.5 years

2016

8/26/16

Naperville

$2,572,000

6.75%

11 years

2016

8/16/16

Roanoake

$2,420,000

6.75%

11 years

2016

7/16/16

Wichita

$2,513,800

7.14%

9 years

2015

2/19/16

10%

typical Lease structure signed C a p r at e c o r r e l at i o n

C a p R at e

1.5

4.5

7.5

10.5

Years remaining on lease

13.5

Lease Type

Rent Increase

10% every 5 years

Rent

Typical SF

± $165,000

± 4,000-10,000 SF

Lease Term

Average Sales

10- 11 years

± $1,000,000

M AT T H E W S T M M AY 2 0 1 7 | 7 7

McDonald’s is the leading global foodservice retailer with more than 36,000 locations worldwide serving nearly 69 million people in 118 countries each day. McDonald’s restaurants are operated by either a franchisee, an affiliate, or the corporation itself. The corporation’s revenues come from the rent, royalties, and fees paid by the franchisees, as well as sales in company-operated restaurants.

Key Statistics Credit Rating

BBB+

Market Cap

$116.06B

# of Locations

36,889

Headquarters

Oak Brook, IL

7.5 Comparison 10 Cap Rate

12.5

New Construction (20 years)

3.97%

10 Years Remaining

4.79%

5 Years Remaining

5.25%

Current on Market Data # of Properties

±34

Average Cap Rate

4.34%

Average Lease Term Remaining

14.35 years

Average Price

$2,406,431

Lowest Cap Rate

3.00%

Highest Cap Rate

6.00%

2015

2016

w/o cap 73

w/o cap 66

4.00%

4.31%

18.12 years

13.82 years

$2,353,000

$2,089,796

Transactions Average Cap Rate Average Term Remaining Average Price

McDonald’s present day criteria for an “ideal site” includes a corner or corner wrap, with signage on two major streets and a signalized intersection. The physical description is a ±50,000 SF site with the ability to build up to 4,000 square feet. 6%

5.5% 17.5

C a p r at e c o r r e l at i o n

C a p R at e

Overview

4.5%

3.5%

7.5

2.5

12.5

17.5

Years remaining on lease

typical Lease structure signed

Lease Type

Rent Increase

NN or Ground Lease

10% every 5 years

Lease Term

Typical Square Feet

20 years years

Rent

± 6,527 SF

Average Sales

$100,000

$1,733,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Tacoma

$4,933,000

3.85%

17 years

2014

4/24/89

Hawthorne

$3,600,000

3.75%

19 years

2014

4/20/12

Renton

$3,287,500

4.00%

20 years

2015

4/20/83

Sacramento

$2,857,000

3.50%

19 years

2014

4/23/42

Mooresville

$2,110,000

4.51%

13 years

2009

4/27/32

Limerick

$1,970,000

4.35%

15 years

2011

4/26/26

Canton

$1,935,484

4.65%

12 years

2008

4/26/76

Arvada

$1,875,000

5.30%

8 years

2008

4/25/36

Marana

$1,800,000

4.58%

12 years

2008

4/25/03

Rochester

$1,575,000

5.80%

6 years

2002

4/27/19

7 8 | M AT T H E W S T M M AY 2 0 1 7

OVERVIEW Key Statistics Credit Rating

BBB+

Market Cap

$23.31B

# of Locations

± 4,850

Headquarters

Springfield, MO

Cap Rate Comparison New Construction (15 years)

5.95%

10 Years Remaining

6.34%

5 Years Remaining

7.25%

Current on Market Data # of Properties

±31

Average Cap Rate

6.01%

Average Lease Term Remaining

12.31 years

Average Price

$1,197,898

Lowest Cap Rate

5.00%

Highest Cap Rate

8.00%

2015

2016

5.92%

5.96%

13.74 Years

12.2 Years

$1,667,157

$1,656,433

Transactions Average Cap Rate Average Term Remaining Average Price

O’Reilly Automotive, Inc., together with its subsidiaries, engages in the retail of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. O’Reilly’s Automotive Services was founded in 1959 and is headquartered in Springfield, Missouri, where the first store was located. The company provides new and remanufactured automotive hard parts and appearance products. The company’s stores also offer enhanced services and programs such as the recycling and replacement of used parts, diagnostics and system checking and a loaner tool program. O’Reilly’s stores offer their inventory to both Do-It-Yourself and professional service provider customers and pride themselves on providing affordable auto parts to middle-class Americans nationwide. O’Reilly’s operates in over 47 states and plans on continuing its expansion of brick and mortar stores by opening approximately 200 new locations by the end of 2017.

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Jasper

$1,170,000

6.08%

13 years

2009

12/21/16

Gastonia

$1,449,000

6.07%

13 years

2009

12/13/16

Fitchburg

$2,765,000

5.60%

20 years

2016

6/30/16

Taylor

$2,715,000

6.25%

10 years

2007

3/17/16

Cincinnati

$680,000

6.97%

6 years

2012

3/4/16

St. Charles

$2,590,000

5.79%

19 years

2014

12/22/15

Simpsonville

$890,000

5.60%

20 years

2009

11/24/15

Tucson

$1,621,000

5.60%

20 years

2016

11/24/15

Chillicothe

$980,000

6.14%

12 years

2007

10/29/15

$1,245,000

5.75%

20 years

2015

8/1/15

Bennett 9%

C a p r at e c o r r e l at i o n

Lease Type

C a p R at e

typical Lease structure signed

5%-10% every 5 years

Rent

Typical SF

± $92,500

± 7,000 SF

Lease Term

Average Sales

Rent Increase

NN/NNN

2.5

7.5

12.5

17.5

20 years

± $1,700,000

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 7 9

Panera Bread Cafes are located in urban, suburban, strip mall, and regional mall locations. They feature high-quality food in a warm, inviting, and comfortable environment with handcrafted artisan bread baked daily. The menu also features soups, salads, and sandwiches along with seasonal new dishes.

OVERVIEW Key Statistics Credit Rating

N/A

Market Cap

$7.12B

# of Locations

±2,024

Headquarters

St. Louis, MO

Cap Rate Comparison New Construction (15 years)

4.99%

10 Years Remaining

5.45%

5 Years Remaining

5.85%

Current on Market Data # of Properties

±13

Panera Bread was recognized as one of Business Week's "100 Hot Growth Companies." As reported by The Wall Street Journal's Shareholder Scorecard in 2006, Panera Bread was named as the top performer in the restaurant category for one-, five- and ten-year returns to shareholders.

5.01%

Average Lease Term Remaining

12.85 years

Average Price

$3,066,935

Lowest Cap Rate

4.50%

Highest Cap Rate

5.50%

2015

2016

5.43%

5.24%

14.25 years

13.27 years

$2,817,780

$2,272,614

Transactions Average Cap Rate Average Term Remaining Average Price

C a p r at e c o r r e l at i o n

C a p R at e

Average Cap Rate

Panera Bread is a national bakery-cafe concept with 1972 stores, 901 are company-owned bakery-cafes and 1,071 are franchise-operated bakery-cafes located throughout the United States and Canada. The company is also testing new cafe formats designed to expand Panera's reach into nontraditional locations.

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Lease Type

Rent

Typical Square Feet

Lease Term

Rent Increase

Average Sales

10% every 5 years

$2,600,000

$145,000

NNN

15 years

± 4,500 SF

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Greenwood

$3,020,000

4.75%

15 years

2016

2/23/17

Katy

$3,850,000

5.00%

15 years

2016

7/8/16

Tomball

$2,900,000

5.00%

13 years

2013

4/13/16

Aiken

$2,707,407

5.40%

15 years

2015

3/23/16

Nicholasville

$2,600,000

5.76%

10 years

2005

2/24/16

Dayton

$3,096,400

6.00%

4 years

2004

2/11/16

Cedar Park

$3,222,079

5.05%

15 years

2015

11/30/15

Goldsboro

$3,210,000

5.16%

15 years

2015

7/30/15

Delevan

$2,325,000

6.65%

11 years

2006

7/17/15

Dayton

$2,785,000

7.53%

7 years

2006

7/14/15

8 0 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

B+

Market Cap

$25.96B RBI

# of Locations

±2,600

Headquarters

Sandy Springs, GA

Popeyes Louisiana Kitchen is an American chain of fried chicken fast food restaurants founded in 1972 in New Orleans, Louisiana. The company distinguishes itself with a unique “New Orleans” style menu that features spicy chicken, chicken tenders, fried shrimp and other seafood.

Cap Rate Comparison New Construction (15 years)

5.66%

10 Years Remaining

6.68%

5 Years Remaining

7.36%

Current on Market Data # of Properties

On March 27, 2017 Restaurant Brands International, the corporate entity behind Burger King and Tim Horton’s, officially acquired Popeyes Louisiana Kitchen for a whopping $1.8 billion. "Popeyes is a powerful brand with a rich Louisiana heritage...RBI is adding a brand that has a distinctive position within a compelling segment and strong U.S. and international prospects for growth," says Restaurant Brand International CEO Daniel Schwartz.

±22

Average Cap Rate

5.50%

Average Lease Term Remaining

15.22 years

Average Price

$1,801,717

Lowest Cap Rate

3.75%

Highest Cap Rate

8.43%

2015

2016

6.34%

6.29%

14 years

13.35 years

$1,666,429

$1,481,741

Transactions Average Cap Rate Average Term Remaining Average Price

The company operates and franchises over 2,600 Popeyes restaurants worldwide. Of the 1,800 domestic franchised restaurants, approximately 70% are concentrated in Texas, California, Louisiana, Florida, Illinois, Maryland, New York, Georgia, Virginia, and Mississippi.

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Sunland

$2,535,000

8.47%

9 years

1974

2/1/17

Rancho Cordova

$2,150,000

6.92%

15 years

2016

3/10/17

Bakersfield

$570,677

7.75%

2 years

2009

6/6/14

North Charleston

$1,045,000

6.85%

3 years

2002

3/8/16

Liburn

$757,500

5.52%

3 years

1999

9/7/16

Jacksonville

$665,000

5.33%

4 years

1981

5/13/16

Midland

$1,031,000

4.25%

4 years

1995

9/16/16

Hattiesburg

$2,066,360

5.60%

9 years

2000

8/11/16

Tulsa

$2,225,000

5.84%

15 years

2007

1/22/16

Gatonia

$2,215,000

5.84%

18 years

1993

7/7/16

10%

typical Lease structure signed

C a p R at e

C a p R at e C o r r e l at i o n

Lease Type

NNN

2.5

7.5

12.5

17.5

Rent Increase

10% every 5 years

Lease Term

Typical SF

15-20 years

± 2,550 SF

Rent

$90,000

Average Sales

$1,370,000

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 8 1

Key Statistics Credit Rating

B/B2

Market Cap

$4.85B

# of Locations

±4,500+

Headquarters

Camp Hill, PA

Cap Rate Comparison New Construction (15 years)

5.75%

10 Years Remaining

7.25%

5 Years Remaining

8.25%

Current on Market Data # of Properties

±74

Average Cap Rate

6.92%

Average Lease Term Remaining

11.02 years

Average Price

$4,031,241

Lowest Cap Rate

5.00%

Highest Cap Rate

10.50%

2015

2016

7.58%

6.96%

Average Term Remaining

11.27 years

12 years

Average Price

$3,912,724

$4,049,807

Transactions Average Cap Rate

In October 2015, Walgreens Boots Alliance, and Rite Aid entered into a definitive agreement under which Walgreens Boots Alliance would acquire all outstanding shares of Rite Aid for a total enterprise value of $17.2 billion. The combination of Walgreens Boots Alliance and Rite Aid creates a further opportunity to deliver a high-quality retail pharmacy choice for US consumers in an evolving and increasingly personalized healthcare environment. The transaction is expected to close in the summer of 2017. To address regulatory concerns and facilitate approval of the merger, Walgreens Boots and Rite Aid agreed in late 2016 to sell 865 Rite Aid locations to discount retailer Fred's for $950 million. (Source: Vault) 10%

C a p R at e C o r r e l at i o n

C a p R at e

overview

Rite Aid ranks a distant third (behind Walgreen and CVS) in the US retail drugstore business, with more than 4,600 drugstores in more than 30 states and the District of Columbia. Rite Aid stores generate roughly 70% of their sales from filling prescriptions, while the rest comes from selling health and beauty aids, convenience foods, greeting cards, and more, including some 3,500 Rite Aid brand private-label products. More than 60% of all Rite Aid stores are freestanding and over half have drive-through pharmacies. The company was founded in 1962 and is being purchased by pharmacy leader Walgreens Boots Alliance.

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Lease Type

Rent

NNN

$250,000

Lease Term

Rent Increase

20 years

Typical SF ± 11,000 SF

Average Sales

10% every 10 years

$7,000,000

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Rosamond

$7,604,000

5.20%

20 years

2016

3/8/17

Waterville

$11,650,000

6.17%

13 years

2009

3/1/17

Bakersfield

$4,100,000

5.54%

12 years

1999

12/22/16

Costa Mesa

$9,625,000

4.02%

20 years

1963

11/14/16

Woodlake

$5,400,000

5.10%

20 years

2016

9/29/16

Olivehurst

$7,850,000

6.10%

14 years

2009

8/19/16

Queensbury

$6,352,941

6.37%

11 years

2007

8/16/16

Mckees Rocks

$7,108,864

6.25%

20 years

2016

7/26/16

Suffolk

$6,650,000

6.00%

11 years

2007

3/3/16

Monroeville

$6,185,000

7.20%

10 years

N/A

2/19/16

8 2 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

N/A $1.1B

# of Locations

± 3,557

Headquarters

Oklahoma City, OK

Cap Rate Comparison New Construction (20 years)

6.00%

10 Years Remaining

6.17%

5 Years Remaining

7.33%

Current on Market Data # of Properties

±20

Average Cap Rate

6.04%

Average Lease Term Remaining

14 years

Average Price

$2,052,448

Lowest Cap Rate

3.29%

Highest Cap Rate

9.00%

2015

2016

6.37%

6.44%

13.6 years

15 years

$2,039,622

$1,824,982

Transactions Average Cap Rate Average Term Remaining Average Price

For more than 60 years, SONIC, America’s Drive-In has built a dominant position in the drive-in restaurant business. They did so by sticking to what made drive-ins so popular in the first place: made-toorder American classics, signature menu items, speedy service from friendly Carhops and heaping helpings of fun and personality. The company operates over 3,557 restaurants in 45 US states. With a dynamic history, SONIC surges forward while specializing in fresh, made-to-order meals that you can’t get anywhere else. Today, SONIC is the largest chain of drive-in restaurants in America. As a business, they continue to thrive, maintaining strong real sales growth, industryleading customer frequency and high returns for stockholders.

C a p R at e C o r r e l at i o n

C a p R at e

Market Cap

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Rent

Typical SF

NNN

$105,000

± 1,500 SF

Lease Term

Rent Increase

Average Sales

15 years

7.5% every 5 years

$1,200,000

Lease Type

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

$700,000

6.40%

20 years

N/A

11/21/16

Cartersville

$1,422,764

6.15%

15 years

2000

10/14/16

Poulsbo

$2,550,000

5.80%

20 years

2015

9/16/16

Norman

$2,050,000

5.64%

20 years

1993

2/17/16

Tacoma

$2,750,000

6.36%

15 years

1958

11/24/15

Superior

$1,520,000

6.25%

20 years

2005

10/23/15

Commerce City

$2,295,082

6.10%

15 years

2006

10/23/15

Kennesaw

$1,385,000

6.25%

15 years

1955

8/5/15

Universal City

$1,200,000

7.00%

10 years

2003

3/4/15

Texarkana

$748,000

8.86%

6 years

1991

1/3/14

Rockford

M AT T H E W S T M M AY 2 0 1 7 | 8 3

Founded in 1985 and based in Seattle, Starbucks Corporation operates as a roaster, marketer & retailer of specialty coffee worldwide. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single serve and ready-to-drink coffee and tea products, juices and bottled water.

OVERVIEW Key Statistics Credit Rating

Market Cap

87.71B

# of Locations

±13,172

Headquarters

Seattle, WA

Cap Rate Comparison 10 Years Remaining

4.65%

5 Years Remaining

5.95%

The company’s stores also provide fresh food and snack offering; and various food products, such as pastries, and breakfast sandwiches and lunch items. Starbucks licenses its trademarks through licensed stores, grocery, and national food service accounts. The company offers its products under the Starbucks, Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange, Ethos, Starbucks VIA, Seattle’s best Coffee, Frappuccino, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks Discoveries Iced Café’ Favorites brand names. As of March 27, 2016, it operated over 23,921 cafes.

Current on Market Data # of Properties

±48 Free Standing

Average Cap Rate

4.84%

Average Lease Term Remaining

10%

± 10 years $2,166,524

Lowest Cap Rate

3.50%

Highest Cap Rate

8.50%

2015

2016

108

5.63%

5.24%

10 years

$1,812,802

$1,885,662

Transactions Average Cap Rate Average Term Remaining Average Price

C a p R at e

Average Price

C a p R at e C o r r e l at i o n

Years remaining on lease

typical Lease structure signed Rent

Typical Square Feet

$100,000

± 1,500 SF

Lease Term

Rent Increase

Average Sales

10 years

10% every 5 years

$1,150,000

Lease Type NN or NNN

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Stuart

$2,200,000

4.89%

8.5 Years

2005

2/3/17

Cheyenne

$1,810,000

5.10%

10 Years

2016

10/14/16

Sun City

$2,400,000

4.34%

10 Years

2016

8/30/16

Cartersville

$1,825,000

5.25%

5.5 Years

2007

8/24/16

Vernal

$1,252,174

5.75%

10 Years

1978

8/11/16

Chattanooga

$2,380,952

5.25%

11 Years

1997

8/10/16

Monrovia

$3,608,000

3.75%

10 Years

2016

5/17/16

Moore

$1,829,000

5.15%

10 Years

2014

3/16/16

lakewood

$2,950,000

4.85%

10 Years

1986

12/23/15

Albany

$1,899,000

5.13%

10 Years

2015

12/9/15

8 4 | M AT T H E W S T M M AY 2 0 1 7

OVERVIEW Key Statistics Credit Rating

Ba1

Market Cap

$22.59B

# of Locations

±6,400

Headquarters

Irvine, CA

Cap Rate Comparison New Construction (20 years)

5.16%

10 Years Remaining

6.43%

5 Years Remaining

7.09%

Current on Market Data # of Properties

±69

Average Cap Rate

5.75%

Average Lease Term Remaining

15 years

Average Price

$1,929,130

Lowest Cap Rate

3.44%

Highest Cap Rate

11.10%

2015

2016

5.63%

5.48%

14.10 years

15.83 years

$2,029,865

$2,020,496

Transactions Average Cap Rate Average Term Remaining Average Price

The first Taco Bell was opened in 1962 by Glen Bell in Downey, CA, and two years later, the first Taco Bell franchise was sold. Since then, Taco Bell has spread across 22 countries and into over 6,604 individual sites of which approximately 87 percent are franchise owned. Taco Bell is a wholly own subsidiary of Yum! Brands. It specializes in Mexican-style food products, including various types of tacos, burritos, quesadillas, salads, nachos and related items. The brand has a history of releasing innovative products such as the Crunchwrap Supreme and more recently, the Naked Chicken Chalupa and Quesalupa items. Yum! Brands, Inc., is based in Louisville, KT. With over 43,500 restaurants and 1.5 million employees in more than 135 countries and territories, Yum! Brands is a giant in the restaurant space. KFC, Pizza Hut, and Taco Bell, which are the global leaders in the chicken, pizza, and Mexican-style food segments, are all Yum! Brand concepts. Since its spin-off from PepsiCo in 1997, Yum! Brands has become a global company with 50 percent of profits coming from outside the U.S. in 2016. It has nearly twice as many locations in emerging markets to its nearest competitor with over 17,000 restaurants and counting. The Yum! Brands system opens over six new restaurants per day on average, making it a leader in the restaurant space and global retail development.

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Mebane

$2,225,000

5.50%

19 years

1994

4/3/17

Portage

$2,307,617

5.75%

20 years

N/A

3/1/17

Oakdale

$3,000,000

5.00%

20 years

1980

2/28/17

Reno

$3,105,000

4.85%

20 years

2002

2/27/17

Las Vegas

$2,225,000

4.98%

18 years

2008

2/14/17

Andalusia

$1,843,607

5.35%

23 years

2015

2/3/17

Peachtree Corners

$1,230,000

4.86%

18 years

1985

2/1/17

Columbia

$2,437,000

6.50%

12 years

2009

1/13/17

Roland

$1,383,709

6.20%

12 years

2009

1/13/17

Shawnee 8%

$2,719,764

5.50%

12 years

2004

1/4/17

typical Lease structure signed

7.5%

C a p R at e C o r r e l at i o n

C a p R at e

6.5%

2.5

7.5

12.5

Years remaining on lease

17.5

Rent Increase

NNN

10% every 5 years

Rent

Typical SF

Lease Term

Average Sales

$110,000

5.5%

Lease Type

20 years

± 2,400 SF

$1,378,000

M AT T H E W S T M M AY 2 0 1 7 | 8 5

overview Key Statistics Credit Rating

Private

Market Cap

N/A

# of Locations

± 1,200

Headquarters

Tokyo, Japan

Cap Rate Comparison New Construction (15-20 years)

5.50%

10 Years Remaining

6.50%

5 Years Remaining

7.00%

Current on Market Data # of Properties

±5

Average Cap Rate

TBC Corporation is one of the nation’s largest vertically integrated marketer of tires for the automotive replacement market. The Company’s retail operations include Company-operated tire and automotive service centers under the “Tire Kingdom”, “Merchant’s Tire & Auto Centers”, and “National Tire & Battery” brands, and franchised stores under the “Big O Tires” brand. TBC markets on a wholesale basis to regional tire chains and distributors serving independent tire dealers throughout the United States, Canada, and Mexico. Through its Carroll Tire wholesale distribution centers, the Company also markets directly to independent tire dealers across the United States. Carroll Tire Company sells a wide variety of proprietary and national brands from 38 distribution centers. TBC Brands division represents thirteen proprietary brands of tires throughout North America, including MultiMile, Eldorado, Sumitomo, Harvest King, Power King, and Towmax, and specializes in passenger, commercial, farm, and specialty tires. Each brand is produced by nationally recognized manufacturers and has a reputation for quality, safety and value. These brands are distributed to independent retailers and wholesalers throughout the United States, Canada, and Mexico.

5.70%

Average Lease Term Remaining

10%

12.8 years $1,694,000

Lowest Cap Rate

5.50%

Highest Cap Rate

6.20%

2015

2016

6.34%

6.24%

Average Term Remaining

10.75 years

10 years

Average Price

$1,900,000

$2,300,000

Transactions Average Cap Rate

C a p R at e

Average Price

C a p R at e C o r r e l at i o n

1.5

4.5

7.5

10.5

13.5

Years remaining on lease

typical Lease structure signed Rent

Typical Square Feet

NNN

$100,000- $160,000

± 5,000 - 12,000 SF

Lease Term

Rent Increase

Average Sales

20 years

10% Every 5 years or CPI

$1,550,000

Lease Type

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Melbourne

$1,391,000

6.55%

5 years

1995

5/25/16

Saint Petersburg

$1,190,000

7.00%

3 years

1990

3/10/16

Orange Park

$1,400,000

7.00%

4 years

1994

6/24/15

Seminole

$1,200,000

7.00%

3 years

1963

2/13/15

Holiday

$1,340,000

5.63%

9 years

1962

1/7/15

Saint Peters

$1,250,000

6.75%

7 years

1990

2/13/17

Canton

$3,400,000

5.49%

20 years

2011

2/3/17

Youngstown

$2,005,000

5.85%

15 years

2015

12/22/16

Dallas

$3,850,000

5.54%

18 years

2009

12/7/16

Charlotte

$2,900,000

5.57%

15 years

2016

8/16/16

8 6 | M AT T H E W S T M M AY 2 0 1 7

OVERVIEW Key Statistics Credit Rating

N/A

Market Cap

$8.98B

# of Locations

± 1,600

Headquarters

Brentwood, TN

Cap Rate Comparison New Construction (15 years)

6.00%

10 Years Remaining

6.50%

5 Years Remaining

7.50%

Current on Market Data # of Properties

±29

Average Cap Rate

6.38%

Average Lease Term Remaining

±11 years

Average Price

$3,235,500

Lowest Cap Rate

5.00%

Highest Cap Rate

8.00%

2015

2016

6.51%

6.21%

12 years

12.50 years

$3,963,009

$4,384,338

Transactions Average Cap Rate Average Term Remaining Average Price

Tractor Supply Company is the largest operator of rural lifestyle retail stores in the United States. The company operates over 1,600 retail stores in 49 states, employs more than 24,000 team members and is headquartered in Brentwood, Tennessee. The company was founded in 1938 as a mail order catalog business offering tractor parts to America’s family farmers. Today, Tractor Supply is a leading edge retailer with annual revenues approximately $6.8 billion. Tractor Supply stores are located primarily in towns outlying major metropolitan markets and in rural communities. These stores provide unique products to support their customers’ rural lifestyle, from welders and generators to animal care products and men and women’s workwear. You can also find pet supplies, animal feed, power tools, riding mowers, lawn and garden products and more. Tractor Supply is continuing to grow with new stores and improved product offerings. (Source: Tractor Supply)

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

El Cajon

$7,650,000

5.00%

15 Years

2016

11/18/16

New Windsor

$5,000,000

6.10%

15 years

2016

3/6/17

Andrews

$3.778,000

6.10%

15 years

2015

2/27/15

Bessemer City

$3,590,000

6.16%

15 years

2014

5/1/15

Atoka

$3,579,600

6.17%

15 years

2015

11/25/16

White Plains

$5,000,000

6.25%

11 years

2006

1/8/15

Jackson

$2,976,000

6.25%

15 years

2015

11/13/15

Pocono Summit

$8,140,000

6.50%

10 years

2010

5/12/16

Guilford

$5,800,000

6.80%

15 years

2015

8/17/16

Philidelphia

$2,840,000

6.94%

13 years

2013

3/16/17

typical Lease structure signed

C a p R at e C o r r e l at i o n

10%

C a p R at e

Lease Type NN

Rent Increase 5-10% every 5 years

Rent ± $260,000

Years remaining on lease

Lease Term 15 years

Typical SF ± 20,000 SF

Average Sales $4,200,000 M AT T H E W S T M M AY 2 0 1 7 | 8 7

The nation’s #1 drugstore chain, Walgreens, operates close to 8,300 stores in all 50 US states, the District of Columbia, the Virgin Islands and Puerto Rico. Prescription drugs are the focus of the company as they account for close to two-thirds of sales; the rest comes from

overview

general merchandise, over-the-counter medications, cosmetics, and

Key Statistics

groceries. Most locations offer drive-through pharmacies and one-

Credit Rating Market Cap

BBB

hour photo processing, which separates them from competition.

$88.87B

Recently, Walgreen Co. fully acquired Alliance Boots, Europe’s leading

# of Locations

±8,175

drug wholesaler, to create Walgreens Boots Alliance, of which it is a

Headquarters

Deerfield, IL

Cap Rate Comparison New Construction (20 years)

5.36%

10 Years Remaining

6.24%

5 Years Remaining

6.95%

Current on Market Data # of Properties

±159

Average Cap Rate

5.75%

Average Lease Term Remaining

subsidiary. Walgreens’ overall value proposition differentiates it from competitors in valuable ways. Specifically, a focus on health gives Walgreens a competitive advantage over other pharmacies. By putting health at the forefront of all aspect of the business and reducing customers’ shopping time, Walgreens has achieved placement in a league of its own as competition aims their focus on things such as convenience, design, or low prices.

14 years 8%

$6,800,000

Lowest Cap Rate

3.80%

Highest Cap Rate

7.50%

2015

2016

132

128

5.78%

6.03%

13 years

$6,700,000

$6,500,000

Transactions Average Cap Rate Average Term Remaining Average Price

C a p R at e C o r r e l at i o n

7.5%

C a p R at e

Average Price

6.5%

5.5%

typical Lease structure signed

2.5

7.5

12.5

17.5

Years remaining on lease

Lease Type

Rent

Typical Square Feet

NNN/NN

$376,100

± 14,429 SF

Lease Term

Rent Increase

Average Sales

20-25 years

10% every 5 years

$10,405,016

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Portland

$8,075,000

5.26%

20 years

2016

3/16/17

Keller

$4,400,000

6.00%

12 years

2000

1/17/17

Wayzata

$11,720,000

5.25%

19 years

2015

1/5/17

Panama City

$5,762,711

5.75%

15 years

2006

8/1/16

Everett

$4,150,000

7.40%

4 years

2000

3/17/16

Chatham

$4,800,000

5.50%

19 years

2015

1/27/16

Fairborn

$5,341,000

6.70%

7 years

2002

10/30/15

Red Bank

$11,300,000

5.00%

20 years

2015

10/2/15

Glen Ellyn

$6,400,000

6.56%

7 years

2002

10/1/15

Virginia Beach

$12,000,000

5.38%

20 years

2015

9/8/15

8 8 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

Market Cap

$221B

# of Locations

±699

Walmart Neighborhood Market, now with over 700 stores nationwide,

Headquarters

Bentonville, AR

has 22 straight quarters of positive comparable sales growth and 11 straight quarters with comps up 5% or more. This “Neighborhood

Current on Market Data # of Properties

±19

Average Cap Rate

5.10%

Average Lease Term Remaining

15 years

Average Price

$12,380,000

Market” is a chain of grocery stores with sizes varying from 28,000 to 66,000 square feet, with an average size of 42,000 square feet. These Markets offer a variety of products including full lines of groceries, pharmaceuticals, health and beauty aids, photo services, and a limited selection of general merchandise. Neighborhood Markets and other

Lowest Cap Rate

4.50%

small formats operate in 31 states and Puerto Rico (under the Amigo

Highest Cap Rate

5.50%

banner).

2015

2016

5.03%

5.20%

19 years

14 years

$11,018,300

$12,219,200

Transactions Average Cap Rate Average Term Remaining Average Price

Recent Sales Comparables City Sumter

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

South Carolina

$11,734,732

5.22%

13.5 years

2015

2/27/17

Saint Peters

Missouri

$12,610,208

5.30%

14.5 years

2016

2/6/17

Pueblo

Colorado

$12,154,000

5.20%

15 years

2016

7/29/16

Savannah

Georgia

$15,225,000

5.22%

14 years

2015

7/21/16

Mobile

Alabama

$13,346,000

5.30%

14 years

2015

5/9/16

Tennessee

$14,858,956

5.17%

15 years

2016

4/29/16

Virginia

$13,166,666

5.40%

14.5 years

2015

4/4/16

San Antonio

Texas

$11,200,000

5.15%

14.5 years

2015

3/24/16

Goose Creek

South Carolina

$12,800,000

5.19%

14 years

2014

10/21/15

Georgia

$11,584,000

5.09%

14.5 years

2014

3/3/15

Murfreesboro Forest

Albany

typical Lease structure signed Lease Type NNN

Rent Increase

Rent

10% at renewal options

$530,000

Lease Term

Average Sales

Typical SF

15 - 20 years

$4,200,000

± 41,000 SF

M AT T H E W S T M M AY 2 0 1 7 | 8 9

overview Key Statistics Credit Rating

Private

Market Cap

Private

# of Locations

±720

Headquarters

Chester Heights, PA

Cap Rate Comparison New Construction (20 years)

4.30%

10 Years Remaining

5.75%

5 Years Remaining

6.50%

Wawa, Inc., is a privately held company with a chain of more than 720 convenience retail stores located in Pennsylvania, Maryland, Delaware, Virginia, New Jersey, and Florida. The stores offer builtto-order foods, beverages, coffee, fuel services, and surcharge-free ATM’s. Most Wawa net lease properties offer investors long-term security and absolutely no management responsibilities in the form of a 20-year primary term ground lease. Strong real estate fundamentals of the property sites drive the demand and value of Wawa triple net lease properties. Wawa's real estate team has specific site selection criteria, which focuses on key trade area location characteristics. Wawa net lease properties are typically located at signalized corners and out-parcel/pads of shopping centers with good visibility and ingress/egress.

Current on Market Data # of Properties

±10

Average Lease Term Remaining

17.88 Years

Average Price

$4,704,900

Lowest Cap Rate

4.20%

Highest Cap Rate

5.25%

2015 Transactions

5.10%

4.88%

Average Term Remaining

19.25 years

19.2 years

Average Price

$4,210,082

$3,895,859

Average Cap Rate

7.5% 7% 6.5% 6% 5.5%

2016

C a p R at e C o r r e l at i o n

4.64%

C a p R at e

Average Cap Rate

5% 4.5% 4%

2.5

7.5

12.5

17.5

Years remaining on lease

typical Lease structure signed Lease Type Ground Lease

Rent

Typical Square Feet

$600- $900 /SF

± 5,600 SF

Lease Term

Rent Increase

20 years

8 - 10% every 5 years

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Lake Worth

$8,070,000

4.40%

20 years

2017

N/A

Marlton

$7,020,000

4.46%

20 years

2015

8/23/16

Saint Petersburg

$4,911,111

4.50%

19 years

2013

N/A

Viera

$4,255,319

4.70%

20 years

2016

6/27/16

Bridgeville

$4,761,000

5.12%

19 years

2014

3/16/15

Blue Bell

$5,175,000

5.20%

13 years

2008

2/4/15

9 0 | M AT T H E W S T M M AY 2 0 1 7

overview Key Statistics Credit Rating

Market Cap

$279B

# of Locations

±6,225

Headquarters

San Francisco, CA

Wells Fargo & Company owns Wells Fargo Bank, which is one of the largest banks in the U.S. with more than 8,800 bank branches in over 40 states. Community banking represents Wells Fargo’s largest segment. Its wholesale banking arm handles corporate banking across the U.S. and around the world; activities include investment banking and capital markets, securities investment, commercial real estate, and capital finance. Its wealth, brokerage, and retirement segment provide financial advisory services.

Cap Rate Comparison New Construction (20 years)

4.50%

10 Years Remaining

5.25%

5 Years Remaining

5.75%

Current on Market Data # of Properties

±19

Average Cap Rate

The bank holding company also runs Wells Fargo Home Mortgage and Wells Fargo Insurance Services and mortgage brokerage services. The company’s Wealth and Investment Management segment offers financial planning, private banking, credit, and investment management and fiduciary services, as well as retirement and trust services. It serves clients through approximately 8,600 locations and 13,000 ATMs; online and mobile banking; and offices in 42 countries. Wells Fargo & Company was founded in 1852 and is headquartered in San Francisco, California.

5.51%

Average Lease Term Remaining

7.9 years

Average Price

$2,721,378

Lowest Cap Rate

4.02%

Highest Cap Rate

7.50%

2015

2016

5.59%

5.92%

8.1 years

7.75 years

$1,652,335

$2,682,877

Transactions Average Cap Rate Average Term Remaining Average Price

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Rialto

$3,190,000

5.22%

4 years

1965

3/13/17

Houston

$2,495,000

4.85%

11 years

2005

5/19/15

Clovis

$2,150,000

4.73%

7 years

1980

3/8/15

Lakeland

$1,890,400

5.00%

11 years

2008

1/27/15

Jacksonville

$2,909,500

5.25%

10 years

2004

1/16/15

Bowie

$5,950,000

5.27%

11 years

2006

12/17/14

Hartford

$4,630,000

4.75%

14 years

2008

10/16/14

Hamilton Square

$2,000,000

5.10%

10 years

1955

9/12/14

Clearwater

$2,925,000

4.96%

9 years

1980

6/30/14

Cumming

$3,360,000

4.46%

10 years

N/A

3/31/14

C a p R at e C o r r e l at i o n

C a p R at e

Rent Increase

Lease Type

NNN Ground Lease

10% Every 5 years

Lease Term

Typical SF

15-20 years

± 2,500 - 4,000 SF

Rent

Average Deposits

$200,000 0

2.5

7.5

12.5

17.5

$105.21M

Years remaining on lease

M AT T H E W S T M M AY 2 0 1 7 | 9 1

Overview Key Statistics Credit Rating

B+

Market Cap

The Wendy’s Company is the world’s third largest quick-service hamburger company. Founded by Dave Thomas in 1969 and grown to include more than 6,500 franchise and Company restaurants in the U.S. and 29 other countries and U.S. territories worldwide.

$3.4B

# of Locations

±6,500

Headquarters

Dublin, OH

Cap Rate Comparison New Construction (20 years)

Recently, Wendy’s has enacted a brand transformation which has manifested in a powerful way in their contemporary Image Activation restaurants. Not only do these restaurants deliver a striking street appearance, but they are also designed to enhance the customer experience. Prominent features include fireplaces, a variety of inviting seating options, Wi-Fi, flat-screen TVs, digital menu boards and more. Most of the company’s locations are franchised and generate most of its sales in the US. New market expansion and further development within existing markets will continue to be dominant drivers of Wendy’s worldwide strategy over the coming years.

5.25%

10 Years Remaining

6.15%

5 Years Remaining

7.05%

Current on Market Data # of Properties

±75

Average Cap Rate

5.76%

Average Lease Term Remaining

14.3 years

Average Price

$2,006,648

Lowest Cap Rate

4.35%

Highest Cap Rate

7.75%

2015

2016

5.74%

5.83%

15.7 years

13.3 years

$2,090,443

$2,149,410

Transactions (Source: Wendy’s)

Average Cap Rate Average Term Remaining Average Price

Recent Sales Comparables City

State

Sales Price

Cap Rate

Term Remaining

Year Built

Sale Date

Norman

$2,176,771

7.00%

10 years

1976

4/11/17

Greely

$2,762,000

5.25%

18 years

2015

2/8/17

Scottsdale

$2,650,000

5.55%

6.5 years

2013

8/15/16

Valencia

$5,400,000

4.63%

17 years

2014

6/14/16

Greensboro

$1,600,000

5.00%

19 years

2015

4/21/16

Las Cruces

$2,220,000

5.25%

18 years

1979

2/1/16

Orlando

$2,200,000

5.34%

20 years

1999

11/5/15

Clanton

$1,992,735

5.85%

20 years

1994

9/18/15

Butler

$2,175,000

6.00%

20 years

2014

5/20/15

Memphis

$1,460,000

7.25%

6 years

1978

5/20/15

C a p R at e C o r r e l at i o n

7.5%

Lease Type

C a p R at e

typical Lease structure signed Rent Increase

NNN

10% every 5 years

Rent

Typical SF

Lease Term

Average Sales

6.5%

$130,000

± 3,000 SF

5.5%

2.5

7.5

12.5

Years remaining on lease

9 2 | M AT T H E W S T M M AY 2 0 1 7

17.5

20 years

$1,540,000

W E ’ L L L E T T H E N U M B E R S D O T H E TA L K I N G

5 N AT I O N A L C A P R AT E R E C O R D S 9 8 . 3 % L I S T T O S A L E S R AT I O 350+ PROPERTIES ON MARKET $11.2B CLOSED

™

w w w. m a t t h e w s . c o m

M AT T H E W S T M M AY 2 0 1 7 | 9 3

9 4 | M AT T H E W S T M M AY 2 0 1 7

The Medical Real Estate Market: dialysis centers By: Michael Moreno and Bryant Hoover

Dialysis is a life-sustaining medical procedure for people with kidney malfunctions that prevent their body from extracting toxins and waste materials from the blood. Approximately 14 percent of the U.S. population suffers from Chronic Kidney Disease (CKD) â&#x20AC;&#x201C;448,000. While kidney failure can affect anyone, with little in the way of symptoms in its early stages, African Americans, Asian Americans and Native Americans have a higher incidence rate than Caucasians, and women more than men. Dialysis centers are clinics that provide dialysis

treatments. The industry grew as the number of patients spiked upward since 1988. Although the rate of new CKD patients has leveled off since 2006, the number of clinics and rate of business consolidation continue unabated.

M AT T H E W S T M - M AY 2 0 1 7 | 9 5

THE 10 LARGEST U.S. DIALYSIS PROVIDERS IN 2016 # patients

In-ctr conv. hd

in-ctr. Noc hd

home hd

Units

patient growth 5/16 (vs. 5/15)

Fresenius Medical Care

184,084

163,883

1,714

2,855

15,632

2,277

5,747 (6,331)

3.2% (3.7%)

Davita Kidney Care

181,800

158,000

1,400

3,100

19,300

2,266

7,500 (8,000)

4.3% (4.84%)

U.S. Renal Care

23,992

21,370

382

2,240

367

7,942 (1,663)

49.4% (11.5%)

Dialysis Clinic Inc.

15,158

13,329

193

1,636

237

358 (338)

2.48% (2.3%)

American Renal Associates

13,420

12,050

100

117

1,153

198

1,170 (1,490)

9.6% (13.8%)

Satellite Healthcare

7,316

5,700

143

174

153

775 (326)

11.8% (5.2%)

Atlantic Dialysis Managment

2,301

2,230

1,299

326 (678)

5.2% (12.1%)

Northwest Kidney Centers

1,638

1,339

75 (n/a)

5% (n/a)

Centers for Dialysis Care

1,590

54 (10)

-3.3% (0.3%)

Rogosin Institute

1,506

1,401

n/a

Dialysis provider

% growth 5/16 (5/15)

(n/a)

SOURCE: NEPHROLOGY NEWS

DIALYSIS CENTERS: A GROWING BUSINESS DOMINATED BY TWO COMPANIES A look at the Top Ten providers and the number of patients they serve provides a snapshot of the market: The two largest providers treat more than threequarters of the market â&#x20AC;&#x201C; more than 366,000 patients. With a collective annual growth rate among the ten largest providers of 5-6 percent and continued market consolidation, their share of patient treatments will likely continue to expand.

MEDICAL IS A GOOD SECTOR BUT DIALYSIS CENTERS ARE EVEN BETTER The medical sector for single tenant net lease is forecast to remain active in 2017 and into 2018, with investors attracted to the long-term outlook for healthcare, including significant growth in the Baby Boomer demographic: more than 10,000 people file for Medicare each day. Dialysis is covered by Medicare, and thus provides a guaranteed revenue source for dialysis centers. Likewise, Medicaid provides a steady (although lower rate) revenue source in states that provide Medicaid for low-income residents. Dialysis Centers can be a rewarding addition to a portfolio for investors and property owners and managers â&#x20AC;&#x201C; with a few caveats. Matthews CRE focused on the performance of the top two companies, Fresenius Medical Care and DaVita Kidney Care, to present a deeper look at this growing niche market.

DIALYSIS CENTERS CAP RATES When you look at the medical market as a whole, cap rates remain unchanged in the third quarter of 2016, with a median cap rate of 6.50 percent. By contrast, the single net lease cap rates for the medical sector that includes Fresenius and DaVita compressed approximately 22 basis points.

MEDIAN ASKING CAP RATES % BY YEAR BUILT 8 7 6 5 4 3 2 1 0

2012-2017 2005-2011 2000-2004 Pre 2000 DaVita

SOURCE: COSTAR ANALYTICS

9 6 | M AT T H E W S T M M AY 2 0 1 7

Fresenius

PRIVATE SECTOR IS JOINING THE INVESTOR POOL According to a recent NREI research report, real estate institutions and investment funds are the primary investor pool for dialysis clinics. In the past 12 months, however, the private sector has made a major push in acquiring these deals.

MEDICAL ASSETS VS. RETAIL ASSETS An investor evaluating a medical asset will find that the sector is similar to retail, with comparable data on cap rate, credit, and lease term. However, medical assets differ in two significant areas: how an investor evaluates the location for a medical location, and to gauge the profitability of the proposed lessor.

EVALUATING LOCATION: Real estate investors are well-aware of the age-old adage “location, location, location.” While this truism holds true for both medical and retail assets, the best location for a medical asset like a dialysis clinic is typically quite different than a standard retail site. For example, an investor in the market to buy a free-standing Applebee’s restaurant would want it on a busy street, outparcel to a big box store like Walmart, or Costco, and in close proximity to a residential area. Assuming rents were in line with the market, the lease term sufficient, and the building in good condition, the investor would have all the elements for a smart investment. By comparison, evaluating an investment in a dialysis clinic requires a different set of criteria, including: Proximity to a hospital Proximity to a convalescent home State requirements (some states require a Certificate of Need) Proximity to freeways and major traffic arteries Significant area for on-site parking Demographics

Demographics are important for retail, of course. Typical demographics for a retail location like an Applebee’s focus on a younger population, a household size that includes kids, and at least a moderate level of disposable income.

FRESENIUS MEDICAL CARE AG & CO. KGaA

Demographics for a dialysis center, by contrast, include: M O O DY ’ S

O U T LO O K STA B L E

A n o ld e r p o p u la ti o n Lo w e r in co m e p o p u la ti o n s E th n ic m ak e -u p fa vo ri ng A fr ic an A m e an d /o r N at ri ca n , A si an iv e A m e ri ca re si d e n ts n

STA N DA R D & PO O R’ S

H ig h e r ar e a in ci d e n ce o b e si ty, a of co to ki d n e y fa m m o n p re cu rs o r ilu re P roxi m it y to tr an sp o rt at p u b lic io n

DAVITA HEALTHCARE PARTNERS INC

M o d e st o n -s av ai la b ili ty it e p ar ki n g

EVALUATING PROFITABILITY: An investor considering the acquisition of a retail asset will first look at sales revenues – the most important barometer of performance. Typically, the next step is to compare those revenues to similar retail operations in the area and by category on a regional or national level. The ratio of the rent the tenant is currently paying to the tenant’s gross sales is a good yardstick as to the viability of the retail operation.

STA N DA R D & PO O R’ S

M O O DY ’ S

O U T LO O K STA B L E

Medical assets don’t easily fit retail formulas. Most importantly, an investor will not have access to revenue figures, since the majority of revenues are reports to insurance agencies and government healthcare agencies like Medicare and Medicaid; even if an investor knew these figures, the payments by insurers are often lower than the initial submissions and may finalize as net revenues only after a period of months.

As such, the investor is at the mercy of any data the tenant chooses to supply. If the tenant provides a balance sheet, the amount of revenue from patients paying cash will not appear on the tenant’s accounts receivable; the dating of accounts receivable must be viewed with knowledge of medical industry standards for insurer payment cycles. The closest comparison to retail’s sales volume benchmark is adjusted net cash flow.

WAYS TO FIGURE OUT THE OPERATIONAL VIABILITY OF A MEDICAL ASSET

HOURS OF OPERATION

PATIENT COUNT

According to the National Kidney Foundation, the average cost of kidney dialysis without insurance is about $500 or more per treatment. For a patient receiving a standard three treatments per week, the annual cost is more than $72,000 a year. An investor can thus use a patient count times $500 to create a rough approximation of gross revenues, keeping in mind that:

NUMBER OF SHIFTS

NUMBER OF STATIONS

There are different types of kidney failure and differences in the frequency of dialysis required Not all patients need show up for three treatments a week, even when it is proscribed Some patients will be covered by private or government insurance, possibly at a lower compensation rate

DIALYSIS CENTERS: RISK VS. BENEFITS For investors practiced in making evaluations of traditional retail operations, sizing up a medical facility like a dialysis center can be intimidating. However, even a rough approximation will indicate that a dialysis clinic can generate significant revenues. When considering the added benefits that a desirable location is often in a lowerpriced real estate area, a smart investor will take the time to consider adding a dialysis clinic to his or portfolio. For more information, please contact: MICHAEL.MORENO@MATTHEWS.COM BRYANT.HOOVER@MATTHEWS.COM 9 8 | M AT T H E W S T M M AY 2 0 1 7

M A T T H E W S ™ HAS HELPED c lo se Y O U R D E A L S , NOW LET’S HELP YOU manage THOSE INVESTMENTS

Property Management | Leasing | Asset Management

™

w w w. m a t t h e w s . c o m

M AT T H E W S T M M AY 2 0 1 7 | 9 9

SINGLE TENANT NET LEASED INVESTMENT COMPARISON

AUTO PARTS AUTO PARTS

1 0 0 | M AT T H E W S T M M AY 2 0 1 7

The two retail industries are often lumped together in the same Auto/ Vehicle-Related category but while they may have some similarities they also have some stark differences. To clarify, an Auto Parts retailer exclusively sells Auto Parts such as Advance Auto, O’Reilly’s, AutoZone or Napa. Auto Service retailers are more along the lines of a Tire Store or any building that has service bay garages such as Firestone, Goodyear, Jiffy Lube, National Tire and Battery, Just Brakes or Midas. Then there is the hybrid, Pep Boys, which offers both parts and service in some of their big box locations. BY BRADEN CROCKETT, AVP AND DIRECTOR, STNL

AUTO SERVICE

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 0 1

c o m pa r a b l e s B O T H R E TA I L S E C T O R S H AV E A F E W P R I M A R Y C O M PA R A B L E Q U A L I T I E S I N C L U D I N G :

•

Recession Proof – As opposed to buying a new vehicle, customers will choose to self-repair or have their vehicles repaired during a recession.

•

Strong Credit Leases – While Auto Service is rarely investment grade due to the guarantor of the lease being a non-wholly owned subsidiary of the parent company, they still come with a strong guarantee as their entire retail operation is under the same umbrella. For example, Firestone Complete Auto Cares are signed under Bridgestone Retail Operations and thus does not come with the multibillion Bridgestone guarantee.

•

Aging Vehicle Fleet – Both retailers benefit from the Aging Vehicle fleet. During the recession, the Obama administration unveiled a “cash for clunkers” program, which initially hurt both retailers. However, a lot of those new vehicles bought are now reaching 3+ years of age which is normally when repairs start to become needed.

For more information, please contact: BRADEN.CROCKETT@MATTHEWS.COM

1 0 2 | M AT T H E W S T M M AY 2 0 1 7

•

Although some new Auto Part’s fee simple leases have 20-year initial terms, both retailers generally sign 15-year fee simple leases and 20 year Ground leases.

•

Both retailers tend to pay rents that are above market. This is mainly because the markets in which Auto Parts stores are located see little to no rent growth and have insignificant demand for retail space. Auto Service retailers must pay higher than market rents due to expensive permitting and development costs. Since the development process is lengthier, developers have longer hold periods, in turn, taking on more risk.

d i f f e r e n t i at o r s pa r t s

s e rv i c e LOCATION

Auto Parts properties are usually in smaller, more tertiary markets. As discount retailers, they prefer to be in a high trafficked location on the outskirts of the main retail corridor, avoiding premier rents. While their location may not be as prime as Auto Service locations, the rent is cheaper per square foot making them more replaceable. However, being in a tertiary market, the location may be too remote for other national retailers. In this case, these assets are tough to lease, and run the risk of not finding a tenant or having to settle for a mom and pops tenant.

Auto Service properties are generally in premier retail locations surrounded by the major retail corridor. This advantage helps facilitate a successful business as customers can drop their car off while they shop. However, sometimes their placement in the retail corridor is not optimal for other retailers. Trips to an Auto Service retailer are often planned destinations rather than convenience and thus are often behind big box retailers and with little to no frontage to the main thoroughfare.

INCREASES IN THE INITIAL TERM OF LEASE Auto Parts retailers used to sign attractive increase structures, but lately, most Auto Parts leases are flat for most of the initial term or do not have an increase for the first 10 years.

Auto Service lease terms typically increase every 5 years, with increases ranging from 5% to 6.5% to 10%. Sometimes the increases are 2% annually or tied to CPI.

DEMOGRAPHICS Auto Parts retailers will enter small tertiary â&#x20AC;&#x153;do it yourselfâ&#x20AC;? markets. These markets are characterized by average to below average income, traffic count, and population.

Auto Service retailers prefer an average to above average income, traffic count, and population. Mid to high-income earners are the target market to pay to have their car repaired.

E-COMMERCE PROOF Auto Parts retailers face the same threats as other retailers because e-commerce can offer a wider inventory selection and same day delivery.

Auto Service retailers act as a unique hedge against the e-commerce industry being that it is a service based industry.

BUILDING TYPE/ABILITY TO REPLACE TENANT Auto Parts are commonly plain vanilla boxes and require minimal tenant improvements. This allows for a wide variety of alternative uses without a costly renovation. Not only do landlords benefit from the cost savings of a cheaper renovation, but they also benefit from a reduced time in between tenants. On average, plain vanilla box space for lease is on the market for 3-months shorter than properties that require extensive improvements such as an Auto Service property.

Auto Service buildings usually have about 1,500 SF of office and 5,000 SF of service bays. For the most part, these service bays are not insulated or require electrical wiring, heating or air conditioning - making these assets more cumbersome to convert to another use. However, since they are predominantly in good locations, there are a number of creative retrofits that allow for unique restaurants or general retail to occupy.

CAP RATES Brand new 20 year Auto Parts retailers ordinarily trade in the 5.25%-5.50% cap rate range.

Brand new 15 year Auto Service retailers ordinarily trade in the 5.50%-5.75% cap rate range.

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 0 3

1 0 4 | M AT T H E W S T M M AY 2 0 1 7

REGIONS OF RETAIL

TAKE A LOOK INTO MARKETS AROUND THE COUNTRY AND WHAT LIES AHEAD FOR SHOPPING CENTER ASSETS M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 0 5

LAS VEGAS Las Vegas, known to many as the entertainment capital of the world and to commercial real estate retailers, investors, brokers as the host of the world’s largest retail convention is the 28th most populated city in the United States. According to Real Capital Analytics, it was the 2nd most active sales market in the country, right behind Los Angeles. There have been some sizable transactions in 2016 that somewhat skew the numbers, but there is no doubt that over the past four years the Las Vegas retail sales market has seen a significant increase in transaction velocity. Let’s take a look at how this volume translates into pricing as well as how it compares to the western market as a whole. Some markets are more elastic to the movement of the overall real estate landscape and Las Vegas was no exception. This market enjoyed significant cap rate compression from 2001 – 2008, decreasing 200 basis points or 25%.

1 0 6 | M AT T H E W S T M M AY 2 0 1 7

THIS DECREASE WAS SOMEWHAT TYPICAL TO THE INCREASES IN VA L U E S W E S AW AC R O S S T H E WESTERN MARKETS. However, what you will see in the comparisons to come to the western markets, Las Vegas saw a much sharper decline in transactions, pricing, and values during the Great Recession. The average cap rate drop was just half of the equation of how hard the market was hit as net operating income also dropped sharply due to decreased retail sales in this market.

THE AVERAGE CAP RATE INCREASED 250BPS OR ALMOST 40% IN AN 18-MONTH PERIOD.

10%

LV AVERAGE CAP RATE VS THE WEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

With new 10-year debt placed on the majority of assets purchased at medium to high Loan-To-Values, many investors inherently lost the majority of their equity. Since the 15-year high cap rate in 2009, cap rates have decreased every year from 2009-2016 and volumes have continued to increase. Investors who have been able to retain ownerships of their properties are selling out of the market that hit them hard in the last recession. As shown, Las Vegas had a more significant drop in values during the recession and a more gradual recovery as investor sentiment was weaker than other markets. Also, while the West as a whole returned to cap rates below the last real estate boom in 2005-2007, Las Vegas has yet to hit 2006-2007 pricing. Also, Las Vegas has shown a slight upward movement in cap rates in 2016 while the West has still seen a slight decrease.

$5B

$4B

'11

'12

'13

'14

'15 '16

LAS VEGAS VOLUME

$3B

$2B

$1B

Las Vegas has shown a strong increase in total volume from 2011-2016.

IT HAS CONSISTENTLY MOVED UP IN THE RANKS AS BEING ONE OF THE MOST ACTIVE MARKETS.

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

M AT T H E W S T M M AY 2 0 1 7 | 1 0 7

IN 2014, IT WAS THE 19TH MOST ACTIVE MARKET AND IN 2015 IT MOVED UP TO THE 15TH MOST ACTIVE MARKET. The recent spike in transactions in 2016 was due to a large portfolio sale that somewhat skewed their new ranking as the 2nd most active market. As shown, in the Great Recession volume dramatically declined both as a total dollar value as well as a percentage of total volume for the overall West market. However, over the past six years, Las Vegas has become one of the most active markets. There have been some notable transactions in 2016, that have somewhat skewed the 2016 figures. However, there is no question that Las Vegas has seen a tremendous increase in volume since the great recession. While volumes have increased greater than the overall West, cap rates have not outperformed the recent decreases in the overall West market. Las Vegas was certainly one of the markets hit hardest by the last recession, and while recovery has been strong and both supply and demand have been strong, there is still investor concerns within this market that are holding pricing levels. We have seen a flattening of cap rates and decreases in transaction volumes in the West in 2016. There have been signs that the market is softening and if history has taught us anything, certain markets are more elastic to these changes. Buyers must get back to the fundamentals of quality real estate and the intrinsic of brick and mortar and not get influenced to take unnecessary risks due to slightly higher yields. Sellers who still currently own in the market, and have during the last recession, should recount the recessionary times and see if they are set up to sustain another pullback. If not, they should seriously consider selling these shopping center assets and move to more stable markets or product types.

EL WARNER

EVP & NATIONAL DIRECTOR SHOPPING CENTERS EL.WARNER@MATTHEWS.COM (949) 873-0507

1 0 8 | M AT T H E W S T M M AY 2 0 1 7

VOLUME ($) YEAR

LAS VEGAS % OF REGION

WEST

2001

66M

1.80%

3.70B

2002

196M↑

2.83%

6.94B↑

2003

749M↑

7.98%

9.40B↑

2004

2.49B↑

15.79%

15.82B↑

2005

913M↓

6.03%

15.15B↓

2006

1.35B↑

7.75%

17.54B↑

2007

1.00B↓

6.72%

14.97B↓

2008

579M↓

10.73%

5.40B↓

2009

169M↓

4.72%

3.58B↓

2010

152M↓

2.81%

5.41B↑

2011

589M↑

7.03%

8.38B↑

2012

555M↓

3.80%

14.64B↑

2013

1.36B↑

9.39%

14.58B↓

2014

1.08B↓

5.73%

18.90B↑

2015

1.45B↑

5.89%

24.71B↑

2016

4.27B↑

20.64%

20.69B↓

LAS VEGAS AVERAGE CONTRIBUTION TO THE WEST VOLUME

8.64 PERCENT

9.34

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

LOS ANGELES Known to most as the home to Hollywood and the â&#x20AC;&#x153;Entertainment Capital of the Worldâ&#x20AC;?, Los Angeles is the most populous city in California and the second most populous city in the United States.

As an international financial, commercial, cultural, media, technology, trade, business, entertainment and education hub, it is unsurprising that Los Angeles benefits from a large economy and strong market fundamentals that have historically insulated Los Angeles retail from the extent of downside risk experienced in more secondary and tertiary markets. According to Real Capital Analytics, Los Angeles continued to be the most active retail market in the country in 2016, despite experiencing a 21% YOY decline in sales volume. Below we highlight some key statistics that compare Los Angeles average cap rate and volume trends with the West market as a whole.

Similar to most markets across the United States, Los Angeles experienced significant cap rate compression between 2001-2007 decreasing 290 basis points prior to the recession. The Great Recession hit Los Angeles the hardest between 2008-2009 when average cap rates rapidly increased 120 basis points. While many investors who had purchased at high Loan-ToValues during the run-up lost the majority of their equity during this time, Los Angeles overall experienced a less dramatic decline in average cap rates and values than other western markets. Even at their highest point in 2009, average cap rates only increased to 7.0%, which was still lower than average cap rates in 2004. Since 2009, average cap rates have decreased every year to a historical low of 5.2%.

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 0 9

10%

LA AVERAGE CAP RATE VS THE WEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

SINCE 2009, AVERAGE CAP RATES HAVE DECREASED EVERY YEAR TO A HISTORICAL LOW OF 5.2% While Los Angeles follows the general market trends of the West, since 2004 Los Angeles consistently beats other Western markets in terms of lower than average cap rate.

AS A WHOLE, THE WEST RETURNED TO AV E R AG E C A P R AT E S J U ST BELOW THOSE EXPERIENCED AT THE PREVIOUS MARKET PEAK IN 2007. Los Angeles experienced a less dramatic drop in value during the recession and a more rapid recovery with significantly more prominent cap rate compression. Although the West looks to be experiencing a gradual leveling out, Los Angeles continues to experience an increase in values through 2016. As the most active retail market in the country, Los Angeles has had large total volume for the past five years. At the same time, volume has been decreasing since the dramatic increase in 2014. This downward trend in volume is consistent with retail transaction activity as a whole, which according to RCA fell 46% YOY in February 2016. Despite this decrease in volume, strong investor demand and market fundamentals continue to compress cap rates in the Los Angeles market.

1 1 0 | M AT T H E W S T M M AY 2 0 1 7

$6B

$5B

'11

'12 '13 '14 '15 '16

LOS ANGELES VOLUME

$4B

$3B

$2B

$1B

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

T O TA L D O L L A R VA L U E F O R B OT H LO S A N G E L E S A N D T H E W E S T S H A R P LY D E C L I N E D I N 2008 AS THE MARKET ENTERED THE RECESSION.

VOLUME ($) YEAR LOS ANGELES % OF REGION

WEST

2001

1.02B

27.56%

3.70B

2002

1.45B↑

20.89%

6.94B↑

2003

2.27B↑

24.22%

9.40B↑

2004

2.76B↑

17.45%

15.82B↑

2005

3.32B↑

21.96%

15.15B↓

2006

3.51B↑

20.01%

17.54B↑

2007

3.73B↑

24.98%

14.97B↓

2008

1.04B↓

19.39%

5.40B↓

2009

529M↓

14.78%

3.58B↓

2010

1.07B↑

19.87%

5.41B↑

2011

1.78B↑

21.30%

8.38B↑

2012

3.46B↑

23.69%

14.64B↑

2013

3.54B↑

24.30%

14.58B↓

2014

5.61B↑

29.70%

18.90B↑

2015

5.35B↓

21.66%

24.71B↑

2016

4.30B↓

20.82%

20.69B↓

LOS ANGELES AVERAGE CONTRIBUTION TO THE WEST VOLUME

22.33 PERCENT

23.83

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

Total dollar value for both Los Angeles and the West sharply declined in 2008 as the market entered the recession. Nonetheless, at every point in each market cycle, Los Angeles proves to be a very active market contributing to significant amounts of transaction volume in the West. Los Angeles continues to lead the way in demand for retail, beating other leading Western markets in both average cap rate and volume trends. While similar to other markets Los Angeles was certainly negatively impacted by the Great Recession, it was more insulated than secondary markets that saw more dramatic declines and more gradual recoveries. Strong underlying real estate fundamentals in Los Angeles driven by a strong business and economic hub within a dense population yield cap rates and volume metrics in Los Angeles that beat the rest of the Western markets. Both average cap rate and transaction volume trends indicate a softening in the market. Cap rates in the West are flattening. Transaction volume is decreasing amongst waning investor demand driven largely by the concern over the health of retailers and interest rate changes among other factors. Of course, some markets are more susceptible to these changes in investor sentiment than others. In Los Angeles, a city poised for “experiential retail”, vacancy rates are very low and expected to further decrease while rents are expected to further increase. Strong demand with forward momentum is expected to continue in Los Angeles, particularly in major urban submarkets while secondary markets may begin to flatten out over the course of the next year more similar to the Western market trends. Investors in the market should evaluate their current portfolios to determine what assets may be long term holds versus which assets have the potential to suffer a pullback in the next downturn that hits Los Angeles. Owners should consider selling shopping center assets that are at peak value today with no future upside and that have too much inherent risk to be a 10+ year hold.

LINDSAY TSUMPES

AVP & DIRECTOR SHOPPING CENTERS LINDSAY.TSUMPES@MATTHEWS.COM (949) 873-0270

M AT T H E W S T M M AY 2 0 1 7 | 1 1 1

ORANGE COUNTY

Famous for its tourism and world famous attractions like Disneyland, Knottâ&#x20AC;&#x2122;s Berry Farm and 40 plus miles of beaches, Orange County is one of the most sought after places to own real estate. Behind Los Angeles and San Diego, Orange County is the third most populated county in California. Unlike its larger neighbors to the north and south, Orange County does not have a defined urban center. The desirability of owning real estate is based on the beautiful natural terrain, temperate weather and the highest income county in Southern California. The real estate market in Orange County is strong. Throughout this article, we will discuss the factors that have affected the real estate market in this beautiful county. According to Real Capital Analytics (RCA), like San Diego county, Orange county has seen decreasing cap rates 1 1 2 | M AT T H E W S T M M AY 2 0 1 7

ever since the peak in 2010. Orange County has seen cap rates compressing at a faster rate than any other Southern California county. This most likely is due to the growing belief that Orange County is a prestigious place to own real estate, with very little risk. The demand is higher than the limited supply of real estate on the market and occupancy rates are stronger than ever.

ACCORDING TO RCA, SINCE 2011, ORANGE COUNTY HAS SEEN A MUCH STEEPER INCREASE IN PRICES COMPARED TO THE WEST MARKET. In 2016, the gap between average cap rate on the west versus Orange county almost reached a 100-basis point delta. This is a strong sign for retail owners.

Since 2010, Orange County has not seen much consistency in transaction volume. Investors saw a steep drop in cap rates from 2014 to 2015 creating a strong incentive for real estate owners to sell their assets at the height of the market.

IN 2016, THERE WAS A STEEP DROP IN TRANSACTION VOLUME, MOST LIKELY DUE TO A GAP IN SELLER AND BUYER PRICING EXPECTATIONS. Since 2016 cap rates were even more aggressive than the already low caps in 2015, this could have been the breaking point for buyers causing a drastic shift in transaction volume. A noteworthy transaction that somewhat skewed the data was the sale of the $289 million Bella Terra in Huntington Beach. Transaction activity on the west has made a strong come back since the downturn from 20082010. In 2016, Orange county saw a steeper decrease in transactions of -48% compared to the west at -16%.

10%

ORANGE COUNTY VOLUME

$2B

$1.5B

$1B

$500M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

OC AVERAGE CAP RATE VS THE WEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

'11

'12

'13

'14

'15 '16

M AT T H E W S T M M AY 2 0 1 7 | 1 1 3

VOLUME ($) YEAR ORANGE CO % OF REGION

WEST

2001

329M

8.88%

3.70B

2002

743M↑

10.71%

6.94B↑

2003

448M↓

4.77%

9.40B↑

2004

901M↑

5.70%

15.82B↑

2005

1.13B↑

7.46%

15.15B↓

2006

1.23B↑

7.03%

17.54B↑

2007

599M↓

4.01%

14.97B↓

2008

261M↓

4.84%

5.40B↓

2009

335M↑

9.36%

3.58B↓

2010

164M↓

3.04%

5.41B↑

2011

419M↑

5.01%

8.38B↑

2012

41.01B↑

6.95%

14.64B↑

2013

573M↓

3.93%

14.58B↓

2014

674M↑

3.56%

18.90B↑

2015

1.65B↑

6.68%

24.71B↑

2016

866M↓

4.19%

20.69B↓

ORANGE COUNTY AVERAGE CONTRIBUTION TO THE WEST VOLUME

5.62 PERCENT

5.11

15 YEAR HISTORICAL

5 YEAR TREND

1 1 4 | M AT T H E W S T M M AY 2 0 1 7

PERCENT

PROFESSIONALS AND INVESTORS ARE SHOWING SOME HESITATION IN THE REAL ESTATE CYCLE. Consumer confidence hit a high in Q3 of 2016, showing steady year-over-year occupancy growth in Orange County.

REAL ESTATE INVESTORS SEE THE COUNTY AS BEING HOME TO SOME OF THE HIGHEST QUALITY RETAIL PROPERTIES IN THE WEST. Developers have been investing a notable amount of funds toward large retail and mixed-use projects, creating a lifestyle feel for consumers. Noteworthy developments include Pacific City in coastal Huntington Beach, Los Olivos Marketplace in Irvine and The Source in Buena Park. In all, prices and quality of Orange County retail are showing no signs of dropping. Professionals and investors are showing some hesitation in the real estate cycle. There are many factors that play a part, including, the ever-present competition e-commerce has on brick and mortar, interest rate uncertainty and the overall perception that the economy may shift soon. Now, is the time for owners to look at the historical strength of their assets. If there is any uncertainty in the ability to maintain high occupancy through another recession, today’s market would be a good time to dispose of a property while cap rates remain low.

CAITLIN ZIRPOLO

ASSOCIATE SHOPPING CENTERS CAITLIN.ZIRPOLO@MATTHEWS.COM (949) 432-4518

SACRAMENTO

As the capital city of the U.S. state of California, Sacramento has been leading agricultural and transportation center for most of its history. In the past 15 years, as costs have escalated in Californiaâ&#x20AC;&#x2122;s coastal cities, thousands have migrated to the area for its reduced cost of living and proximity to San Francisco and Lake Tahoe. While the population growth and job growth remain strong, Sacramentoâ&#x20AC;&#x2122;s commercial real estate has suffered the most since 2008 among all the California markets. When the other West markets steadily recovered from the recession with decreasing cap rates year over year, the data provided by Real Capital Analytics demonstrates that investors remain concerned about the strength of real estate fundamentals of Sacramento. Below are some key statistics that compare Sacramento with the West market as a whole.

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 1 5

DUE TO DECREASING INTEREST RATES AND HIGH LEVERAGE DURING 2001-2007, CAP RATES HAVE DROPPED 250 BASIS POINTS IN SACRAMENTO Prior to the recession, cap rates were at the same level as Los Angeles and San Francisco, which made Sacramento one of the most desirable markets for investors. Then, the Great Recession hit Sacramento the hardest. Between 2008-2009, the average cap rate rapidly increased 200 basis points and itâ&#x20AC;&#x2122;s back to where it was between 20012002. The dramatic decline in value made many investors lose the majority of their equity during this time. Unlike other coastal California markets which showed strong real estate fundamentals in the recession, Sacramento didnâ&#x20AC;&#x2122;t attract security-driven buyers or benefit from flowing in foreign capital. Although overall the cap rate is trending down, the market has constantly fluctuated year over year. In 2015, the average cap rate reached its lowest at 6.1%, and then it starts to pick up again in 2016. While Sacramento follows the general market trends of the West, since the start of the Great Recession, Sacramento falls behind other Western markets in terms of a higher than average cap rate. In 2015, the average cap rate in the West returned to the historic low in 2007. It continued to trend down and broke the record again in 2016. However, Sacramento experienced a slow recovery with cap rate fluctuation. Even at its lowest point in 2015, the average

10%

cap rate in Sacramento has never been able to return to its historical low before the recession. The West looks to be experiencing a gradual leveling out. Nonetheless, the average Sacramento cap rate has already started to pick up through 2016.

SACRAMENTO VOLUME

$1B

$800M

$600M

$400M

$200M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

SACRAMENTO AVERAGE CAP RATE VS THE WEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

1 1 6 | M AT T H E W S T M M AY 2 0 1 7

'11

'12

'13

'14

'15 '16

VOLUME ($) YEAR SACRAMENTO % OF REGION

WEST

2001

239M

6.45%

3.70B

2002

361M↑

5.21%

6.94B↑

2003

257M↓

2.74%

9.40B↑

2004

459M↑

2.91%

15.82B↑

2005

711M↑

4.69%

15.15B↓

2006

856M↑

4.88%

17.54B↑

2007

552M↓

3.69%

14.97B↓

2008

226M↓

4.19%

5.40B↓

2009

189M↓

5.29%

3.58B↓

2010

319M↑

5.90%

5.41B↑

2011

417M↑

4.98%

8.38B↑

2012

405M↓

2.77%

14.64B↑

2013

423M↑

2.90%

14.58B↓

2014

656M↑

3.47%

18.90B↑

2015

696M↑

2.82%

24.71B↑

2016

578M↓

2.80%

20.69B↓

SACRAMENTO AVERAGE CONTRIBUTION TO THE WEST VOLUME

3.63 PERCENT

15 YEAR HISTORICAL

2.95 PERCENT

5 YEAR TREND

Right before the recession, Sacramento was deemed to be the market with the greatest appreciation potential. Not only was its average cap rate at the same level as Los Angeles and San Francisco, but also it had more transactions and higher volume than both markets between 2005-2007. Investors were buying Sacramento at high loan-to-value and believed it would become the next hot market. When the recession hit, the transaction activity remained the same level as in 2003. Investors saw the risk and wanted to trade out of Sacramento, so there has been a constant supply on the market. Total dollar value for both Sacramento and the West sharply declined in 2008 as the market entered the recession. However, Sacramento showed more activities during the recession. There has never been a supply shortage, and with the compressing cap rate, the transaction

volume continued to grow in the past 5 years.

In 2016, Sacramento had $584M transaction volume, which dropped 16% year over year. There were 68 properties transacted, which increased 21% over 2015. The average cap rate is 6.6% and the average price per SF is $179. As a secondary market in California, even with strong economy growth driven by government, health care, and construction, the retail demand will remain at the same level in the next few years. While the cap rate in the other Western market continues to compress, Sacramento has already started to pick up and most likely it will never return to where it was before the recession. With the flattening of cap rates and decreases in transaction volumes in the west in 2016, buyers who want to go into Sacramento need to study the demographics and the master planning of each sub-market, project future development and retail activities, and understand the risk factors that they are taking. Investors who still currently own in this market should recount the recessionary times and see if their portfolio is set up to sustain another pullback. If not, they should seriously consider selling their retail assets and move to more stable markets or product types.

DAVID XIAO

ASSOCIATE SHOPPING CENTERS DAVID.XIAO@MATTHEWS.COM (310) 579-9337

M AT T H E W S T M M AY 2 0 1 7 | 1 1 7

SAN DIEGO

Widely known as “America’s Finest City”, San Diego is the second largest county on the west coast. San Diego County is famous for its tourism with the worldrenowned San Diego Zoo. This shared with influences from the county’s neighboring country, Mexico, play a large role in the unique culture. Population growth since The Great Recession has been slow, partly due to stronger immigration regulation and an overall high cost of living.

This article will provide further insight on San Diego county’s retail trends and recommended strategies for investors.

1 1 8 | M AT T H E W S T M M AY 2 0 1 7

Cap rates in San Diego County, according to Real Capital Analytics (RCA), have trended downward since the 2010 spike. Apart from a slight increase in 2013 and 2015, cap rates in San Diego have been compressing year over year since the downturn. This is due to the county’s desirable coastal location, strong demographics, and constant demand. San Diego County retail, over the past 16 years has typically traded at lower cap rates than the west market. Based on the RCA data in the “Avg Cap Rate” chart, cap rates in 2016 finally made it back below the pre-recession level. Transaction volume peaked in 2016 and was the strongest year, in terms of price, in the recent past. This high transaction volume stems from increased buyer demand and sellers taking advantage of the low cap rate environment. The spike in year-over-year 2015 transaction volume is slightly skewed due to the largest retail transaction in San Diego County in over a decade.

THIS $185 MILLION DISPOSAL WAS OF A 9 CENTERS PORTFOLIO THROUGHOUT NORTH AND SOUTH COUNTY. The largest transaction over the last 16 years happened in 2001 with the sale of Fashion Valley mall in Mission Valley at $200 million.

San Diego, is the second largest county on the West Coast, behind its neighbor to the north, Los Angeles. In 2016 transaction volume in San Diego was roughly $1.5 billion, where Los Angeles sported over $4 billion. There is no doubt that Los Angeles is a more active market. In San Diego, YOY percent change in transaction volume from 2015 to 2016 grew 26%. In comparison to the West market, which was down 16% from 2015. $2B

$1.5B

SAN DIEGO VOLUME

$1B

$500M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

SD AVERAGE CAP RATE VS THE WEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

M AT T H E W S T M M AY 2 0 1 7 | 1 1 9

REGARDING CAP RATES ALONE, SAN DIEGO HAS SEEN A LARGE COMPRESSION SINCE THE END OF THE RECESSION IN 2010. While cap rates have decreased at a greater rate than the west, transaction volume has not increased at the same rate. In 2016, we saw record low cap rates, especially in highly desirable markets in coastal California. From the first twoquarters of 2017, the high price market of the year prior is looking like it is starting to soften. When investing in real estate in San Diego County, stick to the fundamentals.

LOCATION, LOCATION, LOCATION. Look at which markets and properties struggled in the previous recession and which ones retained high occupancy. For current owners, this is the time to decide if they are in for the long haul through another recession or if they want to sell their center at the high point in the market while occupancy and pricing remains strong.

CAITLIN ZIRPOLO

ASSOCIATE SHOPPING CENTERS CAITLIN.ZIRPOLO@MATTHEWS.COM (949) 432-4518

1 2 0 | M AT T H E W S T M M AY 2 0 1 7

VOLUME ($) YEAR SAN DIEGO

% OF REGION

WEST

2001

375M

10.13%

3.70B

2002

407M↑

5.87%

6.94B↑

2003

772M↑

8.22%

9.40B↑

2004

1.32B↑

8.31%

15.82B↑

2005

1.31B↓

8.62%

15.15B↓

2006

1.01B↓

5.76%

17.54B↑

2007

948M↓

6.34%

14.97B↓

2008

243M↓

4.51%

5.40B↓

2009

293M↑

8.18%

3.58B↓

2010

588M↑

10.86%

5.41B↑

2011

791M↑

9.43%

8.38B↑

2012

1.24B↑

8.50%

14.64B↑

2013

857M↓

5.88%

14.58B↓

2014

883M↑

4.67%

18.90B↑

2015

1.20B↑

4.89%

24.71B↑

2016

1.52B↑

7.36%

20.69B↓

SAN DIEGO AVERAGE CONTRIBUTION TO THE WEST VOLUME

6.83 PERCENT

6.11

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

SAN JOSE The capital of Silicon Valley, San Jose has completely transformed into an economic and technology powerhouse and cultural crossroads between America and Asia over the past 20 years. As the fastest growing places in California, San Jose is filled with high-technology engineering, computer and microprocessor companies.

The booming tech industry has drawn talents across the globe to San Jose by providing great career opportunities and its excellent climate, which has driven its real estate value significantly high and continues to break the record. An example for this tremendous appreciation is Apple Park. In July 2015, Apple paid $138.2 million for the 40AC bare land in San Jose, while the previous owner only paid $40 million for the site in 2010.

By analyzing the data provided by Real Capital Analytics below, we will see how San Joseâ&#x20AC;&#x2122;s real estate market benefit from fast growth of technology industry after the recession and start to out-compete other core markets in California. Similar to Los Angeles and San Francisco markets, right after the Dot-com bubble burst in 2001, the average cap rate increased 100 bps and skyrocketed to 8.75%. During 2002-2007, benefiting from low interest rate and high leverage, average cap rate dropped 300 bps, and this is only half of the equation of how much land appreciated in San Jose.

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 2 1

THE OTHER HALF IS STRONG RENT INCREASE DRIVEN BY SIGNIFICANT POPULATION GROWTH, WHICH IS UP AROUND 30% IN THE PAST 10 YEARS. By entering the Great Recession, San Jose didn’t get hit as hard as other market in the west. When Los Angeles cap rate has increased 250 bps, San Francisco has increased 200 bps during 2007-2011, San Jose only moved up 80 bps from 2007 to 2008 and immediately dropped 50 bps in 2009. Despite the spike in 2010, San Jose began to recover earlier than all the markets due to the fast growth of tech companies. Between 2013-2014, the average cap rate recovered to its historical low before recession, and it continues trending down. While San Jose follows the general market trends of the West, since 2003 San Jose constantly beats other Western markets in terms of lower than average cap rate and stronger rent increase. The boom of tech industry and steady growth of highnet-worth population expedites San Jose’s recovery from recession. San Jose returned to its historical low 2 years before the West recovered from recession.

WHEN THE WEST LOOKS TO BE EXPERIENCING A GRADUAL LEVELING OUT, SAN JOSE CONTINUES ITS APPRECIATION THROUGH 2016.

10%

SAN JOSE VOLUME

$1B

$800M

$600M

$400M

$200M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

In fact, retail properties in San Jose are still traded 75 bps higher in cap rate than core markets like Los Angeles and San Francisco, which indicates its potential growth in value and further compressed cap rate for the strength of its market fundamentals. Despite the time of Dotcom bubble, San Jose has always remained relatively active in all real estate markets. It keeps attracting investors’ attention and there is constant investment demand and supply. Even during the recession, when properties were traded at a higher

SAN JOSE AVERAGE CAP RATE VS THE WEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

1 2 2 | M AT T H E W S T M M AY 2 0 1 7

'11

'12

'13

'14

'15 '16

cap rate, owners were still selling at a premium because of the higher rent. Transaction volume reached its peak in 2003 right after the bubble burst, and transaction has been steady for the past 5 years except 2013. By believing the future of technology and strength of market fundamentals, investors’ appetite changed from taking advantage of high cap rates to investing in security and long-term appreciation. Total dollar value for both San Jose and the West sharply declined in 2008 as the market entered the recession, and started to pick up in 2012. Transaction volume reached its peak during 2014-2016 due to low interest rate and healthy market condition. As compared to the other Western markets, San Jose remained the most active during the turndown. The strong population growth and rent increase made this market become more sustainable than the others.

IN 2016, SAN JOSE HAD $804.9M TRANSACTION VOLUME, WHICH INCREASED 1% YEAR OVER YEAR.

SAN JOSE AVERAGE CONTRIBUTION TO THE WEST VOLUME

4.00 PERCENT

3.80

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

VOLUME ($) YEAR

SAN JOSE % OF REGION

WEST

2001

63M

1.72%

3.70B

2002

122M↑

1.76%

6.94B↑

2003

904M↑

9.62%

9.40B↑

2004

567M↓

3.58%

15.82B↑

2005

380M↓

2.51%

15.15B↓

2006

594M↑

3.39%

17.54B↑

2007

501M↓

3.35%

14.97B↓

2008

251M↓

4.65%

5.40B↓

2009

261M↑

7.31%

3.58B↓

AS WE HAVE SEEN THE FLATTENING OF CAP RATES AND DECREASES I N T R A N S AC T I O N VO LU M E S I N THE WEST IN 2016, IT WON’T AFFECT SAN JOSE AS MUCH AS IT DOES TO OTHER WESTERN MARKETS. Buyers will

2010

452M↑

8.35%

5.41B↑

2011

251M↓

3.00%

8.38B↑

2012

803M↑

5.49%

14.64B↑

2013

413M↓

2.83%

14.58B↓

2014

739M↑

3.91%

18.90B↑

continue to show great interest of going into this market by offering aggressive cap rates and believing in longterm land appreciation. Investors who currently own in this market over the past 8 years have already gained great value. However, with the increasing interest rate and the slowdown of the market, there won’t be much value to be added to their assets. For owners who are driven by yield and potential growth, they should seriously consider realizing the appreciation in value by selling, and moving to other market or product types that generate higher yield and offer larger potentiality.

2015

796M↑

3.22%

24.71B↑

2016

804M↑

3.89%

20.69B↓

There were 45 properties that transacted, which dropped 4% compared to 2015. The average cap rate is 4.9% and the average price per SF is $321. As San Jose is becoming a core market, the 75 bps gap in average cap rate between it and other core markets like Los Angeles and San Francisco will continue converging. Since the investment demand in this market will remain strong in the next few years, along with the expansion of tech industries, it will continue benefiting San Jose’s real estate market.

DAVID XIAO

ASSOCIATE SHOPPING CENTERS DAVID.XIAO@MATTHEWS.COM (310) 579-9337

M AT T H E W S T M M AY 2 0 1 7 | 1 2 3

SEATTLE

Seattle, known for its beautiful mountains and evergreen forests is a seaport destination and is the largest city in the Pacific Northwest. With a population growth rate of nearly 2%, Seattle is recognized as one of the fastestgrowing major cities in the nation. Home to tech goliaths Amazon and Microsoft, this booming economy has caught the attention of real estate investors on a global scale. Cap rates are surpassing pre-recession lows, transaction volume has hit record highs, and vacancy rates are dropping yearly. This research report is intended to shed light on the ever-changing retail landscape in the greater Seattle metropolitan statistical area (MSA).

1 2 4 | M AT T H E W S T M M AY 2 0 1 7

10%

SEATTLE AVERAGE CAP RATE VS THE WEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

'11

'12

'13

'14

'15

'16

When looking at the average cap rate in 2016, it is safe to say that Seattle retail is on demand. Despite some minor flattening seen from 2011 to 2013, Seattle has enjoyed a steady compression of cap rates over recent years.

SINCE 2001, CAP RATES HAVE DROPPED NEARLY 250 BASIS POINTS, FALLING BELOW 6% FOR THE FIRST TIME THIS MILLENNIUM. These compressing yields can be attributed to heightened competition between private and institutional buyers looking for a safe-haven in a world where eCommerce continues to put pressure on brick and mortar. If Seattle’s retail sales continue to outpace the national rate with hockey stick-like projections, we should continue to see aggressive pricing for years to come. When comparing historical cap rates of Seattle to the entire Western market, we see that Seattle is nearly in line with the market average.

IT WASN’T UNTIL 2015 THAT SEATTLE SURPASSED THE MARKET AVERAGE BY 20 BASIS POINTS, THE FIRST TIME IT HAD DONE SO IN OVER 15 YEARS.

$2B

$1.5B

SEATTLE VOLUME

$1B

$500M

0.0

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Overall, the gap in cap rates between Seattle and the West range anywhere from 1-60 basis points since the year 2000, with an average deviation of about 30 basis points difference over time. M AT T H E W S T M M AY 2 0 1 7 | 1 2 5

VOLUME ($) YEAR

SEATTLE

% OF REGION

WEST

2001

293M

7.92%

3.70B

2002

567M↑

8.17%

6.94B↑

2003

460M↓

4.90%

9.40B↑

2004

955M↑

6.04%

15.82B↑

2005

931M↓

6.15%

15.15B↓

2006

1.11B↑

6.37%

17.54B↑

2007

1.06B↓

7.14%

14.97B↓

2008

326M↓

6.05%

5.40B↓

2009

244M↓

6.84%

3.58B↓

2010

135M↓

2.51%

5.41B↑

2011

556M↑

6.64%

8.38B↑

2012

1.36B ↑

9.32%

14.64B↑

2013

1.24B↓

8.52%

14.58B↓

2014

1.18B↓

6.29%

18.90B↑

2015

1.66B↑

6.74%

24.71B↑

2016

1.30B↓

6.32%

20.69B↓

SEATTLE AVERAGE CONTRIBUTION TO THE WEST VOLUME

6.70 PERCENT

15 YEAR HISTORICAL

1 2 6 | M AT T H E W S T M M AY 2 0 1 7

7.24 PERCENT

5 YEAR TREND

It is no secret that retail transaction activity is flourishing due to the strong retail market and its high-level of performance. Since 2011, Seattle has seen a significant increase in transaction activity, most notably the 310% YOY growth experienced between 2010-2011.

IN JUST 5 YEARS (2010-2015), SEATTLE EXPERIENCED AN INCREASE IN DEAL VOLUME OF OVER $1.5 BILLION PER YEAR. Although 2016 did see a decline in transaction volume of about 21%, the robust population and income gains should continue to have a positive impact on the retail sector. When comparing Seattle to the Western Market, we see similar trends over a 15-year span with a massive number of transactions taking place in 2015. You will also notice a YOY decline in deal volume from 2015-2016 of about 16% for the Western market, roughly 5% lower than Seattle. Although Seattle has experienced some deceleration in transaction activity over the last 12-18 months, prices continue to rise due to asset performance and rising rents in retail. Tech salaries paired with rising employment rates are the demand drivers that rank Seattle among the top retail markets to invest in these days. When it comes to retail investing, Seattle checks the boxes. High disposable income, check. Booming tech industry, check. Tourist destination, check. Millennials that love to shop, check. Seattle is a vibrant urban city surrounded by entertainment for everyone. This is a city of innovation and believers, and if history reveals anything, you can bet that Seattle will continue to dominate the retail market in the Pacific Northwest.

JORDAN GOMEZ

ASSOCIATE SHOPPING CENTERS JORDAN.GOMEZ@MATTHEWS.COM (949) 432-4503

DALLAS Dallas has continued to achieve robust growth and demand. For the fourth consecutive year, the Dallas Metroplex is set to add more than 100,000 new jobs with corporate relocations amongst the highest in the country. This increased population growth is spurring tenant growth and development. Dallas has now become one of the top markets in the country for retail development with deliveries being estimated at over 3 million square feet in 2017. Occupancy levels were at a historical high of 93% at the end of 2016.

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 2 7

While some markets, such as Las Vegas and Phoenix have been more elastic and susceptible to large movements in cap rates, Dallas has a flatter chart when it comes to volatility and big swings. Leading up to the recession, Dallas was not seeing the explosive year-over-year growth in residential or commercial values that were being seen in markets such as Las Vegas, Phoenix, and Los Angeles. Some of these markets were seeing 20%+ year-over-year growth in values while Dallas was only experiencing single digit growth numbers.

AS A RESULT, VALUES DID NOT FALL AS MUCH DURING 2007-2009.

Dallas saw cap rates only increase 175 bps from their peak bottom in 2007 to their peak high in 2009 while many other markets in the country saw cap rates rise by 250-300+ bps during their peak. Since 2009, cap rates in Dallas have steadily decreased and are almost back to the historical lows seen in 2007. Investors who have held assets through this period have seen their values increase rapidly and these assets are worth significantly more now than they were even in 2007, because rental rates have risen as well. At the end of 2016, average rental rates for class A retail centers were $26/sf and $16/sf for class B centers. Compared to what?

DALLAS AVERAGE CAP RATE VS THE SOUTHWEST

10%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Dallas cap rates have moved consistently with the rest of the Southwest. From 2001 to 2007, cap rates depressed around 325 bps and then during the recession (20072009) they increased 150-175 bps from their peak low. Dallas, along with the rest of the Southwest, has almost returned to their historical low cap rates experienced in 2007. With strong investor demand and an average sales volume remaining in the $2-3 billion range, Dallas has been very consistent since 2012. As the election neared in 2016 though, investors tapped the breaks due to uncertainty from potential law changes and fear of rates increasing.

VOLUME ULTIMATELY DECREASED F R O M $ 3 B I L L I O N I N 2 0 1 5 TO ~$1.8 BILLION.

1 2 8 | M AT T H E W S T M M AY 2 0 1 7

$3B

'11

'12

'13

'14

'15 '16

DALLAS VOLUME

$2.5B

$2B

$1.5B

$1B

$500M

0.0

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

VOLUME ($) YEAR

DALLAS

% OF REGION SOUTHWEST

2001

344M

15.97%

2.15B

2002 897M↑

17.10%

5.24B↑

2003 690M↓

16.26%

4.24B↓

2004

2.01B↑

24.82%

8.11B↑

2005

1.32B↓

14.85%

8.86B↑

2006

1.91B↑

21.63%

8.82B↓

2007 2.69B↑

25.14%

10.68B↑

2008

610M↓

16.82%

3.63B↓

2009 439M↓

19.37%

2.27B↓

2010

533M↑

13.74%

3.88B↑

2011

1.14B↑

19.73%

5.77B↑

2012

2.29B↑

28.17%

8.11B↑

2013

1.98B↓

21.76%

9.11B↑

2014

2.41B↑

23.94%

10.05B↑

2015

2.99B↑

23.84%

12.52B↑

2016

1.83B↓

16.55%

11.07B↓

DALLAS AVERAGE CONTRIBUTION TO THE SOUTHWEST VOLUME

21.11 PERCENT

15 YEAR HISTORICAL

22.59 PERCENT

5 YEAR TREND

As shown, volume and activity in the Southwest and Dallas came to a screeching halt during the recession, but has picked up since 2010 and increased steadily every year up until a slight dip in 2016. The overall volume numbers are very strong post-recession as the levels of current developments being completed in 2010-2016 are less than half of what they were from 2002-2008 and yet the volumes of transactional levels are near the same, if not higher. The Dallas economy is on fire and Dallas remains in high demand for corporate relocations and tenant demand.

FOR 2017, EMPLOYMENT IS ESTIMATED TO BE UP BY 2.9%, EQUATING TO OVER 100,000 NEW JOBS. Vacancy rates decreased over 90bps in 2016 and are expected to decrease further, increasing overall occupancies to over 95%. Development is expected to deliver over 3 million square feet with overall rent growth year over year increasing 2.6%. Several grocers, restaurants and retailers are all expanding in Dallas and retail space will continue to remain in high demand. Over the past several years, we have seen a flattening and the continuing decrease of cap rates, bringing them back to their almost historical low numbers in both the Southwest and Dallas. As interest rates continue to remain low, now is the opportune time to consider selling retail assets in Dallas. Demand is still very strong from investors and will continue to be as market fundamentals are among the best in the country.

SCOTT HENARD

SVP & REGIONAL DIRECTOR SHOPPING CENTERS SCOTT.HENARD@MATTHEWS.COM (214) 692-2046

M AT T H E W S T M M AY 2 0 1 7 | 1 2 9

HOUSTON The Houston retail market has continued to perform very well even amid the challenges the energy market faced in 2016. In 2017, Houston is set to add an additional 19,500 jobs to the, up from 14,400 jobs added in 2016. Retail occupancies in 2016 were slightly down from 2015 at 95.5%, but still very healthy and near historical highs. Houston saw a tremendous amount of development in 2016, totaling over 3.5 million square feet delivered. As the energy market continues to improve the local Houston market is also expected to continue to rebound.

1 3 0 | M AT T H E W S T M M AY 2 0 1 7

10%

HOUSTON AVERAGE CAP RATE VS THE SOUTHWEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Houston has followed many of the same trends in movement of cap rates when compared to markets such as Dallas, but has been more elastic and volatile. Houston’s local economy is impacted more by the energy market than Dallas’. In 2001 average cap rates were 8.75%, declining to 6.9% in 2007. Even though Houston cap rates declined similar to other Texas cities, the decrease was not as liner and showed more ups and downs. Because of this volatility, Houston has generally lagged Dallas and Austin by 30 to 50bps in cap, which has ultimately attracted investors seeking higher yields. At the peak before the recession, Houston’s average cap rates were 6.9% compared to 6.5% for the rest of the Southwest. By the height of the recession, Houston’s cap rates spiked to 8.65% while the Southwest was just averaging over 8%. Since 2009, Houston has declined to historical lows in 2015 but has moved up and down along the way. Volatility, mostly in the energy sector, drove Houston cap rates back up over 7%. The rest of the Southwest has continued a linear decline back to near historical lows.

$2.5B

'11

'12

'13

'14

'15 '16

HOUSTON VOLUME

$2B

$1.5B

$1B

$500M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

M AT T H E W S T M M AY 2 0 1 7 | 1 3 1

VOLUME ($) YEAR HOUSTON % OF REGION

2001

447M

SOUTHWEST

20.78%

2.15B

2002 924M↑

17.63%

5.24B↑

2003 490M↓

11.53%

4.24B↓

2004 737M↑

9.09%

8.11B↑

2005

1.81B↑

20.47%

8.86B↑

2006

1.41B↓

16.04%

8.82B↓

2007 2.08B↑

19.51%

10.68B↑

2008 818M↓

22.55%

3.63B↓

2009 314M↓

13.86%

2.27B↓

2010

1.03B↑

26.44%

3.88B↑

2011

1.27B↑

22.02%

5.77B↑

2012

1.11B↓

13.72%

8.11B↑

2013

1.68B↑

18.41%

9.11B↑

2014

1.47B↓

14.61%

10.05B↑

2015 2.22B↑

17.77%

12.52B↑

2016

14.21%

11.07B↓

1.57B↓

HOUSTON AVERAGE CONTRIBUTION TO THE SOUTHWEST VOLUME

16.86 PERCENT

15 YEAR HISTORICAL

1 3 2 | M AT T H E W S T M M AY 2 0 1 7

15.84 PERCENT

5 YEAR TREND

Volume in Houston has been strong post-recession. Previously, Houston hit its highest volume at $2.1B in 2007, but exceeded these numbers in 2015 at over $2.2B. Uncertainty regarding future law changes, the election, and energy volatility caused investors to slow down their appetite and transactional volume decreased in 2016 even though retail developers delivered over $4.7M square feet of space. Development is expected to slow to less than $2.5M square feet delivered in 2017 and transactional volume is estimated to remain flat or show a slight increase. The Houston economy is continuing to improve. In 2017, 19,500 jobs are estimated to be added, while in 2016 the total number was less than 15,000. The overall vacancy factor in the market is estimated to improve 20 bps to 5.2%. Rent growth is expected to be 1.7% in 2017. Retail development is expected to decrease significantly to less than 2.5M square feet delivered, down from 4.7M square feet in 2016. Houston will still be among the top 5 cities in nation for new retail space delivered in 2017. Overall, the Houston market’s fundamentals are still healthy and are continuing to improve. It is a great place for investors seeking higher yields to continue buying retail assets. Retail tenant demand remains very strong and historical cap rates in Houston have been 30 to 50bps higher than Dallas and Austin. Along with buyers, sellers will also be positioned well to sell in 2017. Historical cap rates are near their bottom, rates have remained low and market fundamentals relating to vacancy rates, rental rates and employment growth are still improving.

SCOTT HENARD

SVP & REGIONAL DIRECTOR SHOPPING CENTERS SCOTT.HENARD@MATTHEWS.COM (214) 692-2046

Miami continues to expand with the highest level of deliveries since 2008. Known for its luxurious shopping, exquisite dining, white-sand beaches, and vibrant South Floridian lifestyle, Miami continues to remain on the cusp of the retail landscape. Currently under construction and set in the heart of Miami, the Miami World Center is one of the largest private master-planned projects in the United States, complete with over 450,000 square feet of development. Powered by the Miami-Dade International Airport and PortMiami, the Miami economy is lucrative. As vacancy rates compress and new retail is delivered upon growing demand, rent is steadily increasing. The economic and development growth has resulted in many positives for the retail landscape, with vacancy levels at the end of 2016 contracting by approximately 50 basis points. Gross Regional Product (GRP) grew 2.7 percent from 2014 to $142. Over the past six years, Miami has experienced yearly compression in cap rates, and this trend continues into 2017. Miami has slightly significantly lower cap rates, 100 BPS lower, compared to the average cap rates of the Southeast region. Retail demand has contracted vacancy, resulting in rents increasing to the mid $30’s while improving the quality of life. Miami cap rates are significantly lower than the rest of the Southeast. From 2001 to 2007, cap rates depressed approximately 300 basis points. During the Recession

MIAMI

(2007-2009) Miami’s cap rates increased 100 basis points from their lowest number in 2007. Miami has not only returned to their historically low cap rates experienced in 2007, but they have also compressed further than 2007 levels. Moral of the story: Miami’s cap rate environment is fantastic for sellers, and they should act now. Miami’s price per square foot has continuously risen over the past 15 years. Price Per SF is over $400 and is continuing to increase. This increase is no surprise when considering the massive developments taking place. Not to mention the kind of retail and location of retail being developed. The high-end shopping Miami is known for is continuing to expand, as the demand from local residents and tourists increases. Spurred on by the city’s entrepreneurial and energetic spirit, the Miami economy will keep growing, met by a quicker cadence of hiring with employers estimated to add close to 25,000 new jobs. With the expectant completion of the World Center mega-center and a healthy economic environment, not to mention the two million square feet of new product is being delivered in 2017, Miami has a bright future as a leading retail hotspot. With all time historic low cap, interest, and vacancy rates across the board in Miami and the Southeast, there is one clear message: now is the time to sell multi-tenant retail assets. M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 3 3

MIAMI AVERAGE CAP RATE VS THE SOUTHEAST

10%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

VOLUME ($) YEAR

MIAMI

% OF REGION SOUTHEAST

2001

232M

7.02%

3.31B

2002 392M↑

6.44%

6.09B↑

2003

267M↓

2.84%

9.39B↑

2004 839M↑

6.33%

13.27B↑

2005 585M↓

4.99%

11.73B↓

2006

887M↑

6.70%

13.24B↑

2007

1.39B↑

6.18%

22.64B↑

2008 435M↓

7.60%

5.73B↓

2009

196M↓

5.35%

3.67B↓

2010

435M↑

7.91%

5.51B↑

2011

783M↑

7.66%

10.22B↑

2012

1.18B↑

11.18%

10.62B↑

2013

913M↓

6.87%

13.29B↑

2014

1.85B↑

10.15%

18.25B↑

2015

2.09B↑

12.85%

16.27B↓

2016

1.45B↓

9.53%

15.26B↓

JOHNNY BLUE CRAIG

ASSOCIATE SHOPPING CENTERS JOHNNYBLUE.CRAIG@MATTHEWS.COM (214) 692-2068 1 3 4 | M AT T H E W S T M M AY 2 0 1 7

$2.5 B

MIAMI VOLUME

$2 B

$1.5 B

$1 B

$500 M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

MIAMI AVERAGE CONTRIBUTION TO THE SOUTHEAST VOLUME

7.83 PERCENT

10.18

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

CHICAGO Chicago continues to be the anchor of the Midwest market and has seen tremendous growth in the past ten years with one of the highest trade volumes in the nation, per Real Capital Analytics. Although the Midwest is one of the least sought after markets in the U.S., Chicago-land real estate stands as the outlier with some of the most sizable transactions, which can be correlated to the fact that it is the 3rd largest MSA in the country Recent infill development and rising real estate prices from both regional and national investors and developers has led to a steady rise in the price of real estate since the all-time low in â&#x20AC;&#x2122;10 and consistently low cap rates over the past 4 years. We will show some general statistics and graphs to assist in showing how this relates to pricing and highlighting the Chicago land data against that of the Midwest market..

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 3 5

10%

CHICAGO AVERAGE CAP RATE VS THE MIDWEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

As mentioned, Chicago has been the anchor of the Midwest, and while other smaller markets in the region have still been trying to recover from the ’09 –’10 cap rate highs, Chicago’s near constant drop in cap rates has kept the Midwest market from having the highest cap rates among the regions of the United States. In the comparisons to the rest of the Midwest, Chicago has managed to stay compressed below the total Midwest average cap rate. Almost all other major MSAs have seen trade volume in the double digits, while Chicago has consistently had a trade volume ranked in the top 5 of all MSAs. More notable is the fact that since 2011, Chicago has seen the number of properties traded per year in the triple digits and increasing each year, which shows the sharp increase in demand for properties in the MSA. This is also a driving force behind the steadily decreasing cap rates, other than a small jump in ’13, the average cap rate has declined by 120 bps since the 15 year high of 7.7% in ’10. In the recent year and a half, cap rates have marginally rose and appear to be leveling off at a 6.5% cap rate. Investors who have recognized this appreciation in property value have looked to add to the supply of properties for sale to meet the still-large demand for properties in the Chicago-land area. As we can see in the data, Chicago has been below the Midwest average over the entire 15-year analysis period and has drove the regions average cap rate down.

1 3 6 | M AT T H E W S T M M AY 2 0 1 7

'11

'12

'13

'14

'15 '16

When looking closer at the rest of the Midwest markets, we can see the Midwest following the trend of Chicago’s cap rates as opposed to Chicago following the Midwest. The slight cap rate rise in 2016 in Chicago has impacted the Midwest regions cap rates to level off, and we expect Chicago’s cap rates to level off by the end of 2017. Although Chicago showed strong growth in the 8 years leading up to the financial crisis in ’07-’08, it has responded with far stronger growth in transaction volume, making it one of the most active markets in the nation. $5B

$4B

CHICAGO VOLUME

$3B

$2B

$1B

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Outside of a dip in volume in ’14, which was most likely in response to the small spike in cap rates the year before, there has been consistently large increases in volume since ’09, proving that Chicago real estate has been and continues to be in heavy demand. Since the recent 9-year comeback, Chicago has accounted for between 25%-50% of total transaction volume in the Midwest, which further shows that the Midwest is sensitive to the volume and prices set in Chicago. As the heartbeat of the Midwest, Chicago has set the standard. Chicago has consistently been the strongest performer in the Midwest and has outperformed the region as the Midwest has been chasing Chicago cap rates for 15 years. Some notable transactions in and around downtown Chicago may account for a slight skew in the data, but the volume of the MSA shows that it is not enough to unbalance the numbers. The city itself has seen growth in the developing and new areas, and although some fear that it may be shrinking, the overall size of the MSA will offset suburban migration since most of the suburbs are included in the vast MSA.

CHICAGO WILL CONTINUE TO BE THE GOLDEN STANDARD OF THE MIDWEST AND SET THE PRECEDENT FOR OTHER MARKETS TO BE ABLE TO FOLLOW. CHICAGO AVG CONTRIBUTION TO THE MIDWEST VOLUME

30.07 PERCENT

32.76 PERCENT

15 YEAR HISTORICAL JEFFERY MILLER ASSOCIATE SHOPPING CENTERS JEFFERY.MILLER@MATTHEWS.COM (424) 220-7263

5 YEAR TREND

Metro Chicago’s gross domestic product grew by 3.1% in 2015 to $641B and the increased employment will continue to help drive retail demand. This growth rate is faster than the 2.5% U.S. average, according to the U.S. Bureau of Economic Analysis and the growth of the economy will sustain a decreased vacancy rate throughout 2017 even though other markets have faced struggles of ecommerce and changing retail landscape. The demand for assets in Chicago especially on the North Side will cause certain assets to see a lag in the change in prices as it’s expected for interest rates to continue to rise. Sellers and buyers need to reevaluate the properties they currently own especially in tertiary markets that will not be able to weather the storm of the next credit cycle. The looming change of markets and retail landscape might create some motivation in some owners to maximize their current asset values and move into markets that will create upside while providing security in the future.

VOLUME ($)

YEAR

CHICAGO

% OF REGION

MIDWEST

2001

445M

36.63%

1.22B

2002

1.54B↑

31.13%

4.93B↑

2003

1.48B↓

28.78%

5.14B↑

2004

2.01B↑

26.86%

7.48B↑

2005

2.15B↑

24.92%

8.64B↑

2006

2.64B↑

25.50%

10.34B↑

2007

2.86B↑

26.04%

10.99B↑

2008

1.93B↓

44.77%

4.31B↓

2009

390M↓

27.26%

1.43B↓

2010

1.03B↑

33.96%

3.04B↑

2011

1.76B↑

23.06%

7.64B↑

2012

3.30B↑

42.37%

7.78B↑

2013

3.50B↑

32.01%

10.92B↑

2014

2.72B↓

26.35%

10.33B↓

2015

3.66B↑

31.07%

11.77B↑

2016

4.32B↑

34.31%

12.58B↑

M AT T H E W S T M M AY 2 0 1 7 | 1 3 7

WASHINGTON D.C.

Washington DC is known for the most famous piece of residential real estate in the world, the White House. However, since the recession, it has been one of the most desired markets for investors on the East Coast. Since 2013, the average cap rate for DC properties has plummeted from north of 7.5% all the way down to 4%. This 350bps swing is one of the largest in the country and the reasoning sources from the high demand and lack of supply. Compared to the rest of the Mid-Atlantic market, DC blows the other MSA’s out of the water. 2013 was the only year in 20 years that the Mid-Atlantic market average cap rate was lower than the Washington DC market. As of now, DC cap rates currently sit at a whopping 290bps lower than the rest of the Mid-Atlantic market and once again is one of the largest variances in the country between an individual MSA and the market in which it exists.

Transactional volume in Washington DC spiked in 2014 with over $633 million in transactions, but the last two years it has taken a significant dip of about 35% year over year. This is a glaring indicator of owners in that market who bought at the right time holding onto their assets and reaping the higher returns that they purchased the property at in comparison to the current cap rates of today’s market. We predict this hold position will be maintained by owners in this market as the population and gentrification of Washington DC MSA continues to increase. This is a glaring indicator of owners in that market who bought at the right time holding onto their assets and reaping the higher returns that they purchased the property at in comparison to the current cap rates of today’s market. We predict this hold position will be maintained by owners in this market as the population and gentrification of Washington DC MSA continues to increase. Given the extreme demand we have seen in the DC market, there are two options for owners in this market. If they are set on owning in this MSA, then they can continue to hold because a sale and exchange in the same market will most likely not benefit them in terms of cash flow. However, if they are looking to take advantage of the equity they have in their property and significantly increase their cash flow, a sale and exchange to another top MSA would benefit them greatly, and Matthews Retail’s 1031 exchange program is the perfect way to facilitate this transaction. They have in their property and significantly increase their cash flow, a sale and exchange to another top MSA would benefit them greatly and Matthews Retail’s 1031 exchange program is the perfect way to facilitate this transaction.

1 3 8 | M AT T H E W S T M M AY 2 0 1 7

DC AVERAGE CAP RATE VS MID-ATLANTIC

10% 8% 6% 4% 2%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

'11

'12

'13

'14

'15 '16

*Data not available for 2002, 2008, 2009

VOLUME ($) YEAR

2001

115M

12.04%

960M

2002

10M↓

0.40%

2.51B↑

2003

N/A

0.00%

4.85B↑

2004

267M

4.68%

5.72B↑

2005

238M↓

4.09%

5.82B↑

2006

110M↓

2.51%

4.40B↓

2007

360M↑

4.76%

7.56B↑

2008

68M↓

3.61%

1.89B↓

2009

38M↓

2.82%

1.36B↓

2010

172M↑

6.19%

2.79B↑

2011

272M↑

5.41%

5.03B↑

2012

181M↓

3.79%

4.77B↓

2013

194M↑

4.32%

4.50B↓

2014

633M↑

9.64%

6.57B↑

2015

420M↓

5.59%

7.53B↑

2016

266M↓

4.11%

6.47B↓

WASHINGTON DC AVERAGE CONTRIBUTION TO THE MID-ATLANTIC VOLUME

% OF REGION MID-ATLANTIC

JORDAN POWELL

ASSOCIATE SHOPPING CENTERS JORDAN.POWELL@MATTHEWS.COM (214) 692-2160

4.50 PERCENT

5.68

15 YEAR HISTORICAL

5 YEAR TREND

700

PERCENT

WASHINGTON DC VOLUME

600 500 400 300 200 100 0.0

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 M AT T H E W S T M M AY 2 0 1 7 | 1 3 9

ORLANDO Home to Disney World, international business headquarters, and over 2.5 million residents – not to mention the 66 million tourists welcomed each year – residential growth spurs Orlando’s current retail market. As Florida’s probusiness mindset permeates the state, Orlando welcomes rising incomes and new households. Similar to what is driving retail in suburban Atlanta, Orlando’s significant residential growth has led to increased employment, rental rate growth, and contracting vacancy levels by approximately 65-75 basis points by the end of 2016. Over the past six years, Orlando has experienced yearly compression in cap rates. So far, this trend has sustained in 2017. Despite the low cap rate trend across the country, it still is uncommon for cap rates to reach as low as the historically low rates reached in 2007. However, Orlando has not only reached this threshold but has achieved a cap rate that is even lower than 2007. Orlando’s cap rates run relatively parallel to rest of the Southeast. As evident from the data, from 2001 to 2007, cap rates depressed approximately 240 basis points and during the 2007-2010 period, they increased 150 basis from their lowest number. As represented by the data, Orlando’s average price per square foot has been volatile over the past 15 years. Since 2015, the average price per square foot has kept a steady 1 4 0 | M AT T H E W S T M M AY 2 0 1 7

incline from $150 to $172 in 2016. We can estimate that this number will continue to rise, as retail demand has contracted vacancy, pushing rent higher. Across the Southeast, volume has slowed over the past three years, and we now see a bit of a plateau in volume. Orlando, on the other hand, has seen sharp volume increases over the past three years, which corresponds with the markets noticeable residentially-driven retail growth. The Orlando economy is going to continue to grow as employers add close to 50,000 new jobs, and faithful Disney-crazed tourists flock the state like flamingos. Despite slowed construction to 650,000-700,000 SF with more STNL than Multi-Tenant, the Orlando retail environment stays favorable and stable as a robust city rooted in tourism, corporate headquarters, and residential outgrowth. We have seen a flattening of cap rates back to historically low numbers in both the Southeast and Orlando. As interest rates and vacancy rates continue to remain low, it is an excellent time to sell multi-tenant retail assets. Sellers in Orlando should capitalize on their extreme advantage during this low-interest rate environment, especially with Orlando’s record-low cap rates.

ORLANDO AVERAGE CAP RATE VS THE SOUTHEAST

10%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

'11

'12

VOLUME ($) YEAR

ORLANDO % OF REGION SOUTHEAST

2001

309M

9.34%

3.31B

2002

488M↑

8.01%

6.09B↑

2003

265M↓

2.82%

9.39B↑

2004

825M↑

6.21%

13.27B↑

2005

935M↑

7.97%

11.73B↓

2006

987M↑

7.45%

13.24B↑

2007

1.09B↑

4.82%

22.64B↑

2008

342M↓

5.98%

5.73B↓

2009

87M↓

2.38%

3.67B↓

2010

435M↑

7.90%

5.51B↑

2011

434M↓

4.25%

10.22B↑

2012

525M↑

4.95%

10.62B↑

2013

979M↑

7.37%

13.29B↑

2014

826M↓

4.53%

18.25B↑

2015

858M↑

5.27%

16.27B↓

2016

914M↑

5.99%

15.26B↓

JOHNNY BLUE CRAIG

ASSOCIATE SHOPPING CENTERS JOHNNYBLUE.CRAIG@MATTHEWS.COM (214) 692-2068

'13

'14

'15 '16

ORLANDO VOLUME

$1.2B

$1B

$800M

$600M

$400M

$200M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

ORLANDO AVERAGE CONTRIBUTION TO THE SOUTHEAST VOLUME

5.70

5.57

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

M AT T H E W S T M M AY 2 0 1 7 | 1 4 1

CHARLOTTE Home to nearly 2.5 million people Charlotte is the 22nd largest MSA in the country. Charlotte remains one of the staple markets in the Southeast and East Coast commercial real estate environment. The market’s average cap rates over the last five years are nothing but stable, with only a 70bp deviation between the highest and lowest average cap rates.

THE CURRENT AVERAGE CAP RATE FOR 2016 SITS AT 7.1% WHICH IS THE LOWEST THE CHARLOTTE MARKET HAS SEEN IN NEARLY TEN YEARS. In comparison to the rest of the Southeast market, Charlotte’s average cap rates have remained remarkably close to the average cap rates of the Southeast. Since 2011, cap rates for Charlotte have been slightly higher than the Southeast’s, but have remained within 40bps at all times. The Southeast average is weighed down by MSA’s like Atlanta, Orlando, and Miami. Similar to the other top 25 MSA’s, Charlotte saw a huge transactional volume spike in 2014 totaling over $1.1 billion. This spike led to a massive 61% decrease in 2015, with 2016 tapering off at nearly half a billion in volume

1 4 2 | M AT T H E W S T M M AY 2 0 1 7

across 72 properties. The Southeast market has seen dips in volume over the last two years following the spike in 2014. Price per square foot has increased every year over the past four years. In contrast, Charlotte has seen a sharp decline in price per square foot with nearly a $60 decrease over the last three years. Charlotte’s average price per square foot currently sits at about $25 less than the Southeast average. Given the softening we are seeing in the market due to increasing development throughout Charlotte and the resulting decline in price per square foot, we advise that owners who purchased their properties at the bottom of the market or for a value below what it is worth today, actively look at the disposition of that property. The continued softening will make it easier to either exchange into a property with higher returns or exit the market and wait until it softens more to re-enter at a later date. Owners who purchased their properties at the height of the market (2013-2015) are advised to hang on to their investments until the next cycle comes around and development tapers off which will lead to an increased demand for square footage in the Charlotte market.

10%

CHARLOTTE AVERAGE CAP RATE VS THE SOUTHEAST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

VOLUME ($)

'11

'12

'13

'14

'15 '16

CHARLOTTE AVERAGE CONTRIBUTION TO THE SOUTHEAST VOLUME

YEAR CHARLOTTE % OF REGION SOUTHEAST

2001

190M

5.75%

3.31B

2002

359M↑

5.89%

6.09B↑

2003

449M↑

4.78%

9.39B↑

2004

334M↓

2.52%

13.27B↑

2005

511M↑

4.36%

11.73B↓

2006

703M↑

5.31%

13.24B↑

2007

1.17B↑

5.19%

22.64B↑

2008

402M↓

7.00%

5.73B↓

2009

101M↓

2.74%

3.67B↓

2010

205M↑

3.72%

5.51B↑

2011

711M↑

6.95%

10.22B↑

2012

806M↑

7.59%

10.62B↑

2013

557M↓

4.19%

13.29B↑

2014

1.17B↑

6.45%

18.25B↑

2015

463M↓

2.84%

16.27B↓

2016

477M↑

3.13%

15.26B↓

4.81 PERCENT

4.72

15 YEAR HISTORICAL

5 YEAR TREND

$1.2B

PERCENT

CHARLOTTE VOLUME

$1B

$800M

$600M

$400M

$200M

JORDAN POWELL

ASSOCIATE SHOPPING CENTERS JORDAN.POWELL@MATTHEWS.COM (214) 692-2160

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

M AT T H E W S T M M AY 2 0 1 7 | 1 4 3

ATLANTA From corporate relocations to a suburban residential boom, Atlanta is the southern sweet spot for retail growth. The Atlanta economy is continuing to grow as businesses relocate and residential growth responds. As families continue to build in the suburbs, developers are capitalizing on the high demand for urban retail, generating major growth North of Interstate 285. This

1 4 4 | M AT T H E W S T M M AY 2 0 1 7

growth has already made a positive impact on the retail landscape, such as contracting vacancy levels at the end of 2016 to 6.5%. Likewise, the average rent has increased to the mid $14â&#x20AC;&#x2122;s, with no sign of decreased demand on the horizon. But perhaps the largest mixed-used project is the massive retail space near Interstate 85, south of the Mall of Georgia.

10%

ATLANTA AVERAGE CAP RATE VS THE SOUTHEAST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

$5B

Over the past six years, Atlanta has experienced yearly compression in cap rates, creating an appealing market for sellers. Since the beginning of 2016, Atlanta has seen a plateau in cap rates, as retail development has remained steady. Still, Atlanta has slightly higher cap rates compared to income tax-free MSAâ&#x20AC;&#x2122;s such as Orlando, Miami, and Dallas.

With the exception of 2010, cap rates in Atlanta have remained consistent with the rest of the Southeast. From 2001 to 2007, cap rates depressed approximately 270 basis points. During the Recession (2007-2009) they increased 100-120 basis points from their all-time low. Atlanta, along with the rest of the Southeast, has returned to the historically low cap rates experienced in 2007.`

$4B

'11

'12

'13

'14

'15 '16

ATLANTA VOLUME

$3B

$2B

$1B

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Atlantaâ&#x20AC;&#x2122;s transaction volume is yet to come close to its 2007 peak. Volume remains consistent between $2.5B and $3B. With the 2016 Presidential election, political uncertainty negatively affected volume, slowing it down by nearly 50%. But with the retail market booming, 2017 is projected to see a substantial increase in sales volume as a result of the burgeoning retail market, large land development, and high-paying job growth.

M AT T H E W S T M M AY 2 0 1 7 | 1 4 5

VOLUME ($) YEAR

2001

ATLANTA % OF REGION SOUTHEAST

470M

14.20%

3.31B

2002 663M↑

10.89%

6.09B↑

2003

2.31B↑

24.59%

9.39B↑

2004

1.93B↓

14.57%

13.27B↑

2005

1.48B↓

12.68%

11.73B↓

2006 2.24B↑

16.95%

13.24B↑

2007 4.02B↑

17.79%

22.64B↑

2008 836M↓

14.58%

5.73B↓

2009 575M↓

15.67%

3.67B↓

2010

768M↑

13.95%

5.51B↑

2011

1.34B↑

13.19%

10.22B↑

2012

953M↓

8.98%

10.62B↑

2013

1.48B↑

11.20%

13.29B↑

2014

2.05B↑

11.28%

18.25B↑

2015

1.98B↓

12.21%

16.27B↓

2016

1.61B↓

10.60%

15.26B↓

ATLANTA AVERAGE CONTRIBUTION TO THE SOUTHEAST VOLUME

13.87

11.00

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

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PERCENT

Across the Southeast, volume has slowed over the past three years, seeing a flattening in volume. Overall numbers are strong in the Southeast with Atlanta slightly behind the Florida markets.

THE ATLANTA ECONOMY IS GOING TO CONTINUE TO GROW AS BUSINESSES RELOCATE AND RESIDENTIAL GROWTH CONTINUES. AS NEW RETAILERS POUR INTO THE MARKET, ATLANTA CONTINUES TO BE A DEVELOPMENT FRIENDLY CITY AS NEW RETAILERS POUR INTO THE MARKET. We have seen a flattening of cap rates back to historically low numbers in both the Southeast and Atlanta. Interest rates and vacancy rates remain low, but they won’t for much longer. Now is the best time to sell multi-tenant retail assets. As high-end jobs continue to filter into Atlanta, resulting in an outgrowth of residential suburban living, the demand for high-end urban retail has no sign of slowing down. For the most part, any investment in the Atlanta area is considered secure, but the best bets are by far on the sprawling suburban retail developments.

JOHNNY BLUE CRAIG

ASSOCIATE SHOPPING CENTERS JOHNNYBLUE.CRAIG@MATTHEWS.COM (214) 692-2068

DENVER

Strong and stable job creation combined with overall economic improvement has undoubtedly attributed to a stronger retail market for Denver in 2016. Vacancy rates are down due to reduced construction and a heavy demand for space both in the metro and submarkets of Denver. With a healthier economy, Denver has experienced Increased tenant demand to grow market share. With a decreasing unemployment rate, consumer spending is trending upwards and driving retailers to relocate in these markets. Despite the obvious rise in cap rates due to the Great Recession in 2007-2010, the graph shows us that Denver has been continuing a downward compression in cap rates over the last few years. Apart from the slight increase in 2013, cap rates in Denver have been lowering year over year as a result of job growth, rising incomes and increased consumer spending. The continual growth in both the financial and tech sectors over the last few years have increased incomes nearly 25% since 2010. As incomes rise,

consumer spending increases. Retailers such as fitness concepts and grocers notice the continual job growth in the market and want to expand into new concepts that fit the consumers needs. There is no coincidence that the overall vacancy was down 4.8% in 2016 because of the limited space available, reduced construction and the strong tenant demand to enter the Denver market. The heightened retailer demand coupled with a lack of supply has retailers paying higher rents and will continue to drive the vacancy rate down. In comparison to the Southwest region, over the last 16 years Denver continues to experience declines in value just slightly above the other markets. Per Real Capital Analytics, Denver had an average cap rate of 6.74% in 2016 compared to the overall Southwest region at 6.67%. Despite overall transaction volume decreasing in 2016, values in the Southwest reached their lowest point since 2007.

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 4 7

10%

DENVER AVERAGE CAP RATE VS SOUTHWEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Values will continue to compress with investors targeting markets with healthy economies and continuous job growth. Core grocery-anchored and neighborhood anchored centers have and will remain relatively unchanged amongst the Southwest because of the strength of the real estate and the intrinsic value of their core locations. Given the current strength of the economy and retailer desire to expand into the Denver market, they appear to be on the same path as the Southwestern region heading back to peak values experienced in 2007. Since 2011, Denver has continued to see increased deal volume within the market. Over the last several years, Denver has been enjoying stable job creation which in turn has been increasing household incomes and attracting national retailers to expand their market share. With that said, per Real Capital Analytics, Denver was amongst the top 16 largest markets to report record high deal volume in 2016. This ranking is heavily attributed to a notable portfolio transaction sold by Macerich. However, the limited supply of retail listings for shopping centers in Denver has hindered the overall transactional velocity. The lack of supply in the Denver metro for quality real estate will push investors to sub markets where they can create yield that is unachievable in other Southwestern markets.

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$1.5B

$1.2B

'11

'12

'13

'14

'15 '16

DENVER VOLUME

$900M

$600M

$300M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

VOLUME ($) YEAR

DENVER % OF REGION SOUTHWEST

2001

514M

9.06%

2.15B

2002

1.41B↑

6.45%

5.24B↑

2003

878M↓

16.53%

4.24B↓

2004

1.45B↑

8.21%

8.11B↑

2005 2.05B↑

11.13%

8.86B↑

2006

1.75B↓

8.87%

8.82B↓

2007

1.62B↓

10.30%

10.68B↑

2008

601M↓

12.56%

3.63B↓

2009

476M↓

18.14%

2.27B↓

2010

553M↑

3.56%

3.88B↑

2011

1.06B↑

7.94%

5.77B↑

2012

1.52B↑

10.51%

8.11B↑

2013

890M↓

13.04%

9.11B↑

2014

1.45B↑

10.02%

10.05B↑

2015

2.25B↑

10.45%

12.52B↑

2016

1.98B↓

13.11%

11.07B↓

DENVER AVERAGE CONTRIBUTION TO THE SOUTHWEST VOLUME

10.54

11.42

15 YEAR HISTORICAL

5 YEAR TREND

PERCENT

DEVON DYKSTRA

PERCENT

Although retail transaction activity fell in 2016 in the Southwest, Denver continues to thrive and increase at a steady rate. In non-major markets, such as Denver, investors are starting to take more risks on their investments and are becoming more intrigued by centers where they can grow yield through value-add opportunities. Per RCA, in 2016, investors moved up the risk spectrum by mixing up the assets and markets they are willing to undertake. Some of these opportunities lay outside of the Denver metro and into submarkets where there could be upside in rent growth and additional value add. RCA states that private investors accounted for approximately 51% of the retail transactions in 2016. In the Southwest, this is a reoccurring trend where private capital comes to play in the quest for yield in strong economies. Denver continues to be a hot target for retailers expanding footprints, developers seeking unique leasing opportunities from existing spaces and investors searching for yield. Denver is a market investors want to be in. Decreasing vacancy rates, growing rental rates and high tenant demand are driving investors not only to the Denver metro, but also to Southwestern submarkets. Transaction volume in the Southwest will most likely be low, however the demand to break into Denver will continue to be high. Investors will continue to be drawn to Denver with its strong retail fundamentals, population and economic growth and future growth opportunities through existing space. The importance of acquiring and selling intrinsic real estate will continue to be a strong focal point for owners this year. With a large number of loans maturing over the next year, owners who purchased assets during the previous peak in the market must decide whether to sell or refinance their assets once loans mature. In Denver, owners who decide to sell will find a large interest from buyers because of the healthy economy, strong national retailer demand within the market and ultimately the lack of product currently available. More and more investors will continue to target Denver for value-add opportunities in existing shopping centers as well as acquisitions on more stabilized assets with the Denver submarkets where there is a larger potential for rent growth.

ASSOCIATE SHOPPING CENTERS DEVON.DYKSTRA@MATTHEWS.COM (949) 432-4517

M AT T H E W S T M M AY 2 0 1 7 | 1 4 9

High density, increased job infrastructure, new housing expansions and an increased demand for new store formats are what come to mind when we think of the current Phoenix retail market. Phoenix continues to be a soughtafter market for investors driven by attractive yields that cannot be achieved in other markets in the Southwest. With a positive net absorption in Q4 of 2016, developers are seeking new and creative ways to occupy existing space in the market while retailers are seeking to expand their footprints. Heightened interest stems from national tenants and restaurant oriented retailers attracted to the high growth activity within the market.

PHOENIX Unlike other markets across the country, the values in Phoenix did not have as much of a dramatic drop in value during the Great Recession of 2007-2009. Although on average the cap rates increased to just above 8.00%, Phoenix has illustrated a very gradual descent since 2009. Phoenix has always been a dense market with high demand from investors, developers and retailers. As shown above, in 2014 the gradual compression of cap rates becomes more prominent and more aggressive leading into 2016. The more noticeable compression is in part due to the rapid household expansion in the cityâ&#x20AC;&#x2122;s metro, new job creation and heightened demand from retailers wanting to enter the growing economy. The chart to the right shows how the average cap rates in Phoenix continue to decline as another year of heightened activity goes by in the market, with 2016 having an average cap rate of 6.3%.

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Two well-known metro areas, Central Phoenix and Tempe, will continue to be targeted markets for retail developers as the redevelopment of older products will begin to create unique stores, restaurants and bars to fit consumerâ&#x20AC;&#x2122;s needs. The shift in focus to redevelopment of retail properties in areas with recent housing developments and areas where consumers are willing to spend more money will continue to push value in Phoenix. When comparing the average cap rates in Phoenix to those of the entire Southwest, we see a few similarities. As expected, both experienced a drop in overall values in 2007-2009 Phoenix and the Southwest as a whole were hit aggressively in 2009 averaging around an 8.00% cap rate, however since then both have seen gradual compression of values. As shown above, Phoenix has seen a strong recovery in values from 2014 -2016. In 2016, Phoenix matched the peak values experienced in 2007 for the first time in 9 years averaging at 6.3%. As the economy strengthens and retailer demand remains high, the cap rates continue to compress. Values in the Southwestern markets tend to trade more aggressively than most other markets in the country based off the high areas of density, high barriers of entry and overall intrinsic value of the real estate. With a larger focus on redevelopment of existing space in the metro and sub markets of Phoenix, retail values will continue to be pushed as the needs of consumers continue to change.

10%

Per Real Capital Analytics, Phoenix ranked 5th in the top most active retail markets for 2016. However, the overall transaction volume experienced a decrease from 2015 volume. With factors such as a new president coming into office and the constant discussion of interest rates rising, transaction volume slowed.

PHOENIX VOLUME

$2.5B

$2B

$1.5B

$1B

$500M

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

PHOENIX AVERAGE CAP RATE VS SOUTHWEST

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

'11

'12

'13

'14

'15

'16

M AT T H E W S T M M AY 2 0 1 7 | 1 5 1

VOLUME ($) YEAR

PH0ENIX % OF REGION SOUTHWEST

2001

514M

23.91%

2.15B

2002

1.41B↑

26.99%

5.24B↑

2003 878M↓

20.67%

4.24B↓

2004 1.45B↑

17.98%

8.11B↑

2005 2.05B↑

23.18%

8.86B↑

2006

1.75B↓

19.87%

8.82B↓

2007

1.62B↓

15.16%

10.68B↑

2008

601M↓

16.56%

3.63B↓

2009 476M↓

20.98%

2.27B↓

2010

553M↑

14.24%

3.88B↑

2011

1.06B↑

18.44%

5.77B↑

2012

1.52B↑

18.82%

8.11B↑

2013

890M↓

9.78%

9.11B↑

2014

1.45B↑

14.42%

10.05B↑

2015 2.25B↑

18.02%

12.52B↑

2016

17.93%

11.07B↓

1.98B↓

PHOENIX AVERAGE CONTRIBUTION TO THE SOUTHWEST VOLUME

17.78 PERCENT

15 YEAR HISTORICAL

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15.94 PERCENT

5 YEAR TREND

Despite lower transaction volume, there was positive net absorption experienced in Q4 with a large focus on Class A retail space, fast casual dining concepts and grocers. CoStar states there was a positive net absorption of 553,559 SF in Q4 alone. Retailers such as a Target, Dick’s Sporting Goods and Burlington Coat Factory took over big box spaces previously occupied by Sports Authority. Fast casual concepts expanded footprints in areas already experiencing high growth and high incomes. Per Real Capital Analytics, the overall retail transaction activity fell 16% YOY in 2016 with an obvious decline in deal volume but also in price growth. As shown above, both the Phoenix market and the Southwestern region confirm these statistics. Although there was slow price growth in the Southwest as a whole, Phoenix experienced rent growth in areas where the demand superseded the available supply. Per CoStar, rental rates in Q4 were up .89% from four quarters ago. This increase is related to the high demand from fast casual concepts and national retailers seeking Class A space willing to pay larger rents. In summary, there will be a continual desire to occupy preexisting shop space near new residential construction. As more apartments are delivered to the market, developers will find opportunities to insert unique restaurants, shops and bars tailored to the local consumer’s needs. With the overall vacancy rate decreasing to 8.8% (CoStar), the demand for these prime locations will continue to push rents if supply stays low. In the Southwest, we have seen an overall decrease in transaction volume but an increase in cap rate compression. The demand is certainly outweighing the supply in Phoenix as well as the Southwestern region as a whole. As supply is limited in the Southwest , buyers will look to markets like Phoenix for strong real estate with higher yields. Sellers currently in the market will notice a strong buyer demand for intrinsic real estate where the fundamentals of the brick and mortar outweigh any risks.

DEVON DYKSTRA

ASSOCIATE SHOPPING CENTERS DEVON.DYKSTRA@MATTHEWS.COM (949) 432-4517

M MAT ATTTHHEEW WSSTTMM- M AY 2 0 1 7 | 1 5 3

#M I Certainty of Execution

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ILLENNIALS THE 5 BIG CHANGES LEADERS NEED TO MAKE

Pop Quiz: Millennial employees are –

A) Self-involved, lazy, and narcissistic, with an inflated sense of entitlement B) Highly educated, tech-savvy, and hard-working, with a drive to improve the company and the world If you answered both A and B, you share the views of many corporate managers. In a recent study, managers rated Millennials –those 20 to 35 years-old employees in your company– as more narcissistic than prior generations.

Millennials have different goals.

Consider these survey findings about millennials: • 64 percent said they would rather make $40,000 a year at a job they love than $100,000 a year at a job they think is boring • 50 percent expect to change jobs with the next six months • Chief complaints include uncompetitive base pay, uninteresting work and lack of career opportunities • Millennials expect a high level of corporate social responsibility • Costs associated with replacing an employee are 150 percent or more of employee’s annual salary.

Millennials can bring great value to a company. On the plus side, managers report that Millennials bring formidable assets to a company: • 70 percent say Millennials have skills that prior generations lack • 82 percent are impressed with their tech savvy • 60 percent rate Millennials as quick learners. • 82 percent are impressed with their tech savvy • 60 percent rate Millennials as quick learners.

A 2013 Ernst and Young study of managers and employees report that the majority believe that Millennials are the best-suited generation to lead businesses in the coming decade, thanks in large part to their tech skills and commitment to diversity.

“Working Life” vs. “Job.”

The key insight into the millennial generation is time spent at work is more than a job: it is life. With the long hours and intensive commitment that employers require today, millennials seek to carry into their working hours values that traditionally have been reserved for non work hours. Those values can include: • Purpose – How an employee’s work contributes to the company’s “big picture” goals • Contribution – A clear link between an employee’s work and the company’s success • Belonging – An emphasis on teamwork • Social sensitivity – The company is in tune with issues like environmental responsibility and gender equality and is family-friendly

Millennials will take over your company

The business world needs Millennials to perform well. Millennials now make up more than 50 percent of the workforce and outnumber 30 to 50 years-old Gen Xers. In ten years, that percentage will rise to 75 percent. Retaining and getting the most out of millennials requires a change in management strategy and tactics. This change may be challenging for managers who have succeeded in the past with a classic hierarchal management style and left compensation issues to the Human Resources department. Companies can evolve to effectively manage millennials. Matthews CRE offers five tips to help adapt your organization’s management style and reap the benefits of this unique generation.

M AT T H E W S T M M AY 2 0 1 7 | 1 5 5

Lead instead of managing

Engage: Provide millennials with a sense of engagement – that their efforts have an impact beyond the day’s work. More than half of all millennials report that they are not engaged or are actively disengaged in their current positions. Collaborate: Companies who embrace the collaborative model outperform those with hierarchal management styles. “Yes-and” instead of “Yes-but” signals an openness to sharing information and movement toward a jointly created solution.

Develop a sense of partnership: Rally your employees based on the importance of his or her contribution to the team. Develop trust: Millennials prefer face-to-face meetings over memos - 69 percent report they want continuous or weekly updates on performance. Use these meetings to establish rapport and open communications.

Create a strong company culture Company transparency: Research overwhelmingly states that millennials want continuous, real-time job performance feedback. While this level of transparency and time devoted to communications will likely upend traditional practices, the manager gains greater commitment from the employee as he or she aligns with business goals.

unusually high tolerance –and even a preference– for change. For best results, present change as a learning opportunity for career growth.

Respect: Address issues like tardiness or lack of effort as detriments to fellow workers, instead of positioning them as policy infractions.

Goals / Strategy: Millennials seek a clear connection between their output/productivity and the company’s success. Companies that fail to clarify that connection create dissatisfaction that leads to attrition.

Performance optimization

Change / Flexibility: While every workforce has a mix of leaders and followers, Millennials display an

from MANAGER DRIVEN ANNUAL PERFORMANCE REVIEWS

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CASCADING GOALS

Purpose: By presenting an employee’s contributions as an integral part of operations, a manager shifts the focus to business results, and can demand higher buy-in.

to EMPLOYEE/MANAGER COLLABORATION REAL-TIME, CONTINUOUS PROCESS GOALS AND METRIC ALIGNMENT Source: Gallup 2016

$30.5 billion

Annual cost to U.S. economy from millennial turnover resulting from l a c k o f e n g a g e m e n t Source: Gallup 2016

Provide continuous feedback Performance-based metrics and review: Hold regular face-to-face meetings in which employees are encouraged to problem-solve and contribute. 69 percent of millennials report they want continuous or weekly updates on performance. Provide constructive criticism: What differentiates Millennials is that they want advancement tied to the results they bring to the company. Use that as a basis to demand higher productivity.

Acknowledge their impact: Yes, Millennials can be narcissistic. Use that as leverage by acknowledging their impact in terms of how it helps accomplish company goals. Millennials welcome challenges: Position new assignments in terms of learning and career advancement - Millennials rank “interesting and challenging work” as one of the most important aspects of job satisfaction.

“

Millennials will take up 75% of the workforce by 2025

”

29% MILLENNIALS 32% GENXERS 33% BABY BOOMERS 45% TRADITIONALISTS

DISENGAGED

E N G A G E D

Millenials are the least engaged generation at work

55% MILLENNIALS 50% GENXERS 48% BABY BOOMERS 41% TRADITIONALISTS

Source: Gallup 2016

M AT T H E W S T M M AY 2 0 1 7 | 1 5 7

Leverage their knowledge and skills.

Most educated generation in history: Highly-educated Millennials not only bring specific subject matter skills to the job, but also an array of analytical and conceptual skills. Encourage your team to see “the big picture” and to find out-of-the-box solutions. Savvy tech skills: Millennials are well-versed in the digital world. Challenge them to discover

and utilize online resources that can speed work processes and deliver higher-quality output. Multitasking: Having grown up at the intersection of the analog and digital worlds, Millennials are adept at maintaining focus while executing multiple tasks. Properly managed, multitasking results in higher productivity.

Provide opportunities for development. Invest in them: Millennials want interesting, challenging work and the chance to take on new projects that help develop their careers. The more a Millennial invests in the company, the longer he or she will stay – which saves your company money. Provide learning resources: Provide online information resources and when budget allows,

invest in outside coaching, education and career development. Coach: A manager who serves as a coach or mentor is far more likely to boost productivity and retain the employee. Active listening allows a manager to guide an employee on how to match personal growth with company goals.

Properly managed, Millennials will make your company more productive. Not every manager will be gung-ho about abandoning traditional management practices to better incorporate millennials into the workplace. However, properly managed and motivated, Millennials will make a workplace more productive, more innovative and – dare we say it? – more fun.

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