Chicago Metro Area Second Quarter 2008

POPULATION GROWTH SUPPORTING RETAIL INVESTMENT

The long-term outlook for the Chicago retail market is underpinned by healthy fundamentals, such as strong popula-
tion gains and high household incomes. Chicago’s population is forecast expand by nearly 310,000 residents over the next
five years, including 66,000 new inhabitants in 2008. This rate of growth far exceeds projections for other Midwestern met-
ros and will be a key demand driver for retail space. On the supply side, the majority of recent completions are in suburban
areas where residential growth is heaviest and developable land is available. As a result, vacancy in these regions increased
last year, a trend expected to continue as a supply and demand imbalance persists in the short term. Owners of properties
in the city, on the other hand, have recorded two years of robust occupancy levels and above-average rent growth, which
has catalyzed development activity. Indeed, builders are forecast to complete more than 1.3 million square feet in the city
this year, driving a near-term increase in vacancy. Going forward, future development trends in Chicago’s core will likely
shift to renovation and repositioning opportunities due to a scarcity of available land and rising construction costs.

Transaction velocity has remained relatively healthy over the past 12 months, although cap rates have edged higher.
Single-tenant transactions are closing with rates in the low- to mid-6 percent range, while multi-tenant properties are trad-
ing at cap rates in the mid-7 percent vicinity, both up around 40 basis points from the previous 12-month period. While sin-
gle-tenant retail assets downtown continue to change hands, fewer transactions have been occurring in the outlying areas
of Cook County due to its high property taxes; buyers have been focusing on nearby DuPage County as an alternative.
Through the rest of this year, investors will continue to target retail assets in the city, as close-in properties are more likely
to maintain high occupancy levels. Additionally, investor interest will likely increase in suburban areas of DuPage,
McHenry and Lake counties where residential growth continues to supply consistent customer bases.

2008 ANNUAL RETAIL FORECAST

0.1% Employment: Following the addition of nearly 24,000 jobs in 2007, employers in Chicago are
increase in projected to slow hiring to approximately 5,000 new positions this year, a 0.1 percent expansion.
total
employment

5.2 million Construction: Developers are expected to add 5.2 million square feet of retail space to the
square feet Chicago market this year, down 43 percent from 2007. Once completed, this year’s deliveries
will be
completed will expand the metro’s stock by less than 2 percent.

90 basis Vacancy: Supply will continue to outpace demand this year. As such, metrowide vacancy is
point forecast to climb 90 basis points to 9.2 percent by year end.
increase in
vacancy

1.8% Rents: Rent growth is anticipated to slow this year in light of decreasing occupancy. Asking
increase in rents are forecast to rise 1.8 percent to $20.00 per square foot, while effective rents are project-
asking
rents ed to advance 0.9 percent to $17.89 per square foot.
 ECONOMY
◆ Job growth has slowed during the last 12 months, as area employers have
Employment Trends hired 24,000 employees, compared with 43,000 spots during the previous
4% Metro Area
United States period. While 13,500 positions have been added over the last two quarters,
Year-over-Year Change

3%
the rate of expansion is anticipated to decelerate through the remainder of
the year.
2%
◆ Employers in Kenosha and Lake counties created 2,000 jobs in the 12 months
1%
ending in the first quarter, 36 percent less than during the preceding span.

◆ The largest year-over-year growth in the metro was recorded in the educa-
0%
04 05 06 07 08* tional and health services sector. Nearly 12,600 positions were created in this
* Forecast
Sources: Marcus & Millichap Research Services, BLS, Economy.com
segment, down from 16,000 jobs in the year-earlier period. Gains in this
industry are being partially offset by losses in the manufacturing, construc-
tion and financial activities sectors, however.

◆ During the past 12 months, the metro’s median household income has
increased 4.5 percent to $56,000 per year, up from the 1.4 percent growth
posted during the previous year.

◆ Retail sales rose 3.5 percent year over year in the first quarter, compared with
Retail Completions a 4.2 percent uptick one year earlier. The housing downturn has weighed on
8 City consumer spending, a trend expected to continue through 2008.
Suburban
Millions of Square Feet

6 ◆ Outlook: Employers in Chicago are projected to slow hiring to approximate-

ly 5,000 new positions this year, a 0.1 percent expansion.
4

CONSTRUCTION
2
CITY
0 ◆ During the last 12 months, developers have added 9 percent, or 1.3 million
04 05 06 07 08* square feet of retail space, to the city of Chicago’s inventory.
* Forecast
Sources: Marcus & Millichap Research Services, PPR
◆ Nearly 1.2 million square feet is currently slated for completion this year
throughout the city. The 500,000-square foot North Aurora Shopping Center
and the 400,000-square foot Marshfield Plaza account for most of the space
under way; both projects are scheduled to come online in the fourth quarter.

◆ Outlook: Developers are expected to add 1.3 million square feet of retail
space this year, similar to deliveries in 2007. The planning pipeline has
expanded by more than 20 percent over the last year to 2.6 million square feet.
Vacancy Rate Trends
12% City
Suburban SUBURBAN
◆ Just over 7.9 million square feet of retail space has been delivered to subur-
9%
ban Chicago during the past 12 months. There is currently 3.4 million square
Vacancy Rate

feet under way in the region, including 1.2 million square feet in Cook
6%
County and 481,000 square feet in DuPage County.
3%
◆ The historically underserved, affluent area of South Barrington, in the Far
Northwest submarket, is expected to receive the 600,000-square foot
0%
04 05 06 07 08* Arboretum of South Barrington in the fourth quarter of this year.
* Forecast
Sources: Marcus & Millichap Research Services, Reis
◆ Outlook: Approximately 3.9 million square feet of retail space is projected to
be completed in suburban Chicago this year, down from 7.5 million square
feet in 2007. The pipeline for the suburban market remains robust, with 13.4
million square feet in the various stages of planning.

page 2 Marcus & Millichap ◆ Retail Research Report

VACANCY AND RENTS
CITY Asking Rent Trends
◆ Supply growth has outpaced demand for retail space in the city over the past 8% City
12 months. As such, vacancy has increased 30 basis points to 5.2 percent. Suburban

Year-over-Year Change
6%
◆ Rent growth slowed through the year ending in the first quarter, due prima-
rily to the rising vacancy rate and the sluggish economy. Asking rents 4%
climbed 2.9 percent during that span to $23.78 per square foot, and effective
rents gained 2.3 percent to $21.63 per square foot. 2%

◆ Outlook: Vacancy downtown is forecast to rise 40 basis points to 5.5 percent 0%

this year, while asking rents increase 3.4 percent to $24.09 per square foot. Tight 04 05 06 07 08*
* Forecast
conditions will allow owners to keep concessions near their current levels, with Sources: Marcus & Millichap Research Services, Reis
effective rents projected to advance 3.2 percent to $22.01 per square foot.

SUBURBAN
◆ The vacancy rate in suburban Chicago has pushed up 120 basis points in the
past 12 months to 9.1 percent as a result of strong supply-side pressures.

◆ Asking rents ended the first quarter at $19.11 per square foot, up 3.3 per-
cent from one year earlier. Owners have increased concessions, and effec-
Single-Tenant Sales Trends
tive rents have advanced 2 percent since the first quarter of 2007 to $17.06 City
$400

Median Price per Square Foot

per square foot. Suburban

$300
◆ Outlook: Significant additions to inventory this year will drive the suburban
vacancy rate up 110 basis points to 10 percent. Asking rents are expected to $200
climb 2.7 percent to $19.59 per square foot, fueled by elevated premiums from
new space, and effective rents will rise 2.2 percent to $17.55 per square foot. $100

SALES TRENDS** $0
04 05 06 07 08*
CITY * Trailing 12-Month Period
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA
◆ Transaction velocity of single-tenant properties in the city has remained rela-
tively consistent over the last two years. Multi-tenant deal flow, however, has
slowed by 53 percent in the past 12 months.

◆ Average cap rates for single-tenant deals are currently in the mid- to high-6
percent range, and rates for multi-tenant properties have trended upwards
during the last year to the mid- to high-7 percent range.

◆ Outlook: Transaction velocity will be heavily dependent on asset location Multi-Tenant Sales Trends
and tenant quality. Premier locations with national-credit tenants will con- City
$300
Median Price per Square Foot

tinue to attract investor interest, whereas assets needing increased occupan- Suburban

cy or physical improvements may risk longer marketing times. $225

SUBURBAN $150
◆ During the last 12 months, transaction velocity for suburban single-tenant
properties has ramped up 29 percent, while multi-tenant velocity has $75
dropped 34 percent.
$0
04 05 06 07 08*
◆ The median price for all suburban retail types has increased approximately 4
* Trailing 12-Month Period
percent in the past year, with single-tenant properties trading at $266 per Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

square foot and multi-tenant assets at $161 per square foot.

◆ Outlook: The slowdown in multi-tenant sales activity is indicative of investor

flight-to-safety patterns. As such, single-tenant assets are expected to remain ** Data reflect a full 12-month period, calculated on
a focal point for suburban buyers. a trailing 12-month basis by quarter.

Marcus & Millichap ◆ Retail Research Report page 3

 CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION
◆ The Fed has become aggressive in its efforts to prevent an extended econom-
ic downturn. In addition to rate cuts, the Fed has taken measures to stabilize
credit markets and restore liquidity.

Visit www.NationalRetailGroup.com or call: ◆ Lenders are increasingly cautious, resulting in lower loan-to-values (LTVs)
Bernard J. Haddigan and higher debt-service coverage ratios (DSCRs). On average, LTVs are at 60
Senior Vice President, Managing Director
percent to 70 percent, compared with 75 percent to 80 percent in mid-2007,
National Retail Group
Tel: (678) 808-2700 while DSCRs are 1.25x or greater, versus 1.0x to 1.1x prior to the credit crunch.
bhaddigan@marcusmillichap.com
◆ Portfolio lender spreads for anchored retail properties are currently 210 to
300 basis points over the 10-year Treasury, depending on the type of retailer
and tenants’ credit quality. Loans on unanchored properties are pricing at
240 to 325 basis points over the 10-year Treasury. As of early May 2008, con-
duits are slowly reentering the market, pricing retail property loans at 325 to
375 basis points or more over the 10-year Treasury.

◆ The yield on the 10-year Treasury fell to 3.3 percent in March but has since
increased to 3.9 percent, still 135 basis points below last summer. Through
2008, the yield on the 10-year Treasury is forecast to remain in the high-3 per-
Prepared and edited by
cent to mid-4 percent range.
Josh Gisselquist
Research Associate
Research Services
Tel: (602) 952-9669
jgisselquist@marcusmillichap.com

For information on national

retail trends, contact
John Chang
National Research Manager
Tel: (602) 952-9669
john.chang@marcusmillichap.com

Chicago Office:
Greg Moyer
CITY SUBMARKET VACANCY RANKING
Managing Director
gmoyer@marcusmillichap.com
Vacancy Y-O-Y Basis Effective Y-O-Y
8750 W. Bryn Mawr Avenue, Suite 650 Rank Submarket Rate Point Change Rents (psf) % Change
Chicago, Illinois 60631 1 North 4.7% -70 $24.20 1.9%
Tel: (773) 867-1500
Fax: (773) 867-1510
2 South 5.7% 160 $19.10 3.2%

Chicago Downtown Office:

Jonathan Lee
Regional Manager
jlee@marcusmillichap.com
333 W. Wacker Drive, Suite 200
Chicago, Illinois 60606
Tel: (312) 327-5400
SUBURBAN SUBMARKET VACANCY RANKING
Fax: (312) 327-5410
Vacancy Y-O-Y Basis Effective Y-O-Y
Oak Brook Office: Rank Submarket Rate Point Change Rents (psf) % Change
Tim Rios 1 Near West 6.3% 70 $16.75 3.65%
Regional Manager
trios@marcusmillichap.com
2 Far North 6.8% 100 $20.27 -0.25%
One Mid America Plaza, Suite 200 3 Arlington Heights 7.1% -100 $15.15 3.13%
Oakbrook Terrace, Illinois 60181
4 Southwest 7.5% 200 $15.70 1.55%
Tel: (630) 570-2200
Fax: (630) 570-2210 5 Far Northwest 7.8% 170 $16.21 3.71%
6 Kane 8.4% 90 $16.38 4.07%
Price: $150 7 Lake/McHenry 8.7% 30 $18.80 2.17%
8 Far West 10.7% 260 $18.45 2.79%
9 Lombard/Addison 11.6% 270 $17.52 1.45%
© Marcus & Millichap 2008
www.MarcusMillichap.com 10 Far South 14.2% 290 $13.08 -0.23%

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the informa-
tion contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar
Group, Inc., Economy.com, National Association of Realtors, Property & Portfolio Research, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.