News: National

October 28, 2009

Written by Sasha M Pardy (spardy@costar.com)

Q3 Retail Real Estate Report: Better but Not Out of the Woods
Yet
CoStar Retail Webinar Provides Insight into National Retail Real Estate Trends in Third Quarter
CoStar Group subscribers who attended this week's webinar led by Jay Spivey, CoStar Group's Senior
Director of Research & Analytics, were provided with the latest insights on the state of the nation's retail
commercial real estate industry covering economic drivers, statistics and trends regarding the retail
property leasing, development, and sales markets. Spivey also shared CoStar's forecast for what retail
real estate has in store next year and beyond as the nation is expected to climb out of this recession.

RETAIL REAL ESTATE LEASING MARKET

LEASING ACTIVITY
Spotlighting results from CoStar's recently released Third Quarter 2009 National Retail Report, Spivey
showed that quarterly retail leasing activity has improved for two consecutive quarters (24.3M SF in the
third quarter building on the 23.6M SF of retail leasing activity in the second quarter and 23.1M SF of
retail leasing activity in the first quarter.)

NET ABSORPTION
The steady leasing activity seen this past quarter was enough to slightly offset the number of stores that
closed or opted not to renew leases this year. Year-to-date net absorption was a positive 4 million square
feet at the close of third quarter, a significant improvement from the negative 11 million square feet of
year-to-date absorption at the close of second quarter.

Spivey attributed the positive retail absorption to the 14 million square feet of positive absorption
recorded at new shopping centers delivered during the quarter, as well as landlords' motivation to keep
tenants in their stores and "keep their shopping centers from going dark, even at a loss." However, Spivey
pointed out that by his estimate, between 2.5 million and 5 million square feet of this absorption is
attributed to seasonal tenants signing temporary leases -- Halloween stores in particular -- nearly all
these tenants will shut their doors in November.

Analyzing net absorption by property type, Spivey noted that general freestanding retail buildings (+5.3M
SF), power centers (+3.0M SF) and lifestyle centers (+1.1M SF) have all shown positive net absorption so
far in 2009. Net absorption at outlet centers and super regional malls has been flat, while net absorption
at regional malls (-800,000 SF), community centers (-1.1M SF), strip centers (-1.4M SF) and
neighborhood centers (-2.3M SF) remained negative, although much improved over last quarter.

CoStar, together with PPR, forecasts "negative economic absorption to continue for two to three more
quarters, followed by fairly robust positive absorption into 2011 and beyond," said Spivey.

"> For a look at how the nation's retail markets performed in terms of net absorption, click here.

CONSTRUCTION / DELIVERIES
While some have assumed that overbuilding has been a key driver of the retail real estate industry's
issues in this recession, Spivey showed that is not the case.

"On average, the retail sector has added about 1.4% [% square footage of total existing retail space] to
its inventory each year since the '50s," said Spivey, showing that the exceptions have been cycles of
excess development during 1969 to1975, 1977 to 1980, 1984 to 1991, and 1999 to 2002. In addition,
Copyright (c) 2009 CoStar Realty Information, Inc. All rights reserved.
CONTINUED: Q3 Retail Real Estate Report: Better but Not Out of the Woods Yet
Spivey noted that the current level of retail property under construction in every market across the
country, except Washington D.C., is below this 1.4% historical average as well.

"The retail market has not been overbuilt in this most recent cycle. CoStar forecasts there will be about
only a .8% increase in retail inventory during 2009, which would be the lowest (amount of new space
built) ever, so new deliveries are not a part of the problem this time around," said Spivey.

"> For a look at the retail construction picture across the nation's markets, click here.

VACANCY
The overall third quarter national average retail vacancy rate for the third quarter was 7.6%, up slightly
over last quarter and up from a low of 6% at the end of 2007.

Despite the relatively modest 7.6% vacancy rate, Spivey noted the large gap that currently exists
between vacancy and retail space availability. Two years ago, the availability rate was about 75 basis
points higher than the vacancy rate. Since that time, the gap has widened to 220 basis points, with the
third quarter availability rate coming in at 9.8%.

Spivey also noted that vacancy at the nation's shopping centers is much higher, which is where dark space
is much more visible to the general public. Specifically, general freestanding retail buildings have a low
vacancy of 5.5% and vacancy by shopping center type generally increases as centers get smaller, said
Spivey. Within the shopping center category, Spivey showed that strip (11.8%), neighborhood (10.4%)
and community (10.3%) centers have the highest vacancy rates, followed by lifestyle centers (8.4%),
power centers (8%), regional malls (7.9%), outlet centers (5.7%) and super regional malls (3.8%). The
only category showing an improvement in vacancy over the previous quarter was outlet centers; for more
on that, click here.

CoStar, together with PPR, forecasts that the national average retail vacancy rate will rise to higher than
8% in the first quarter of 2010 and following that, is expected to eventually return to pre-recession levels
in early 2012.

"> For a look at retail vacancy on a regional market basis, click here.

RENTAL RATES
At the end of third quarter, the national average retail rental rate (based on quoted asking rental rates,
triple net) closed at $16.94 per square foot. While retail rental rates have been on a decline since second
quarter 2008, Spivey put this in perspective, showing that on an inflation-adjusted basis, "real rents" are
still up about 3% from 2006 levels.

CoStar, together with PPR, forecasts that meaningful retail rental rate growth is not excpected to return
until 2011. Spivey explained that while we may see some improvement in the face retail rental rate over
the next few quarters, inflation-adjusted rents would likely continue to show negative year-over-year
change until mid-2011.

Just as the decline in rental rates lagged negative absorption and increased vacancy, which has had
downward pressure on retail property net operating income, Spivey explained that any improvement in
NOI would follow after rental rate gains return; expected in 2012.

"> For a look at retail rental rate trends in regional markets, click here.

RETAIL PROPERTY SALES MARKET

"The retail property sales market has been hit much harder than the leasing market," said Spivey.

CAPITALIZATION RATES
The national average retail cap rate hit a low of 6.1% in mid-2006 and since, it has risen to reach 7.8%,
which hasn't been seen since early 2004. Spivey said the ultra-low 2006 cap rates weren't sustainable

Copyright (c) 2009 CoStar Realty Information, Inc. All rights reserved.
CONTINUED: Q3 Retail Real Estate Report: Better but Not Out of the Woods Yet
because "buyers were no longer willing to accept just-above Treasury rates of return for a commercial real
estate asset." CoStar found that today's retail cap rate of 7.8% is still below the historical average of
8.2%, and expects the rate to eventually return to the 10% caps that were the norm in the mid-'90s.

PRICING
"Given investors appetite for risk, retail property sale prices are down significantly," said Spivey. He added
that as long as cap rates are rising, sale prices will have to go down until net income improves
significantly.

On an inflation-adjusted basis, the average price per square foot a shopping center sold for increased
relatively steadily from 1995 until hitting a high of about $230 per square foot in 2008, which represented
a generous 9% return per year on a compounded annualized basis. Since that high, the average price has
dropped significantly, although Spivey noted there have been too few transactions across all shopping
center to make a definitive assessment.

The pricing change amongst general freestanding retail buildings sold has been less dramatic, said Spivey,
showing that on an inflation adjusted basis, the average price such properties sold for increased at an
annualized rate of return of about 7.75% since 1995, hitting a high of about $275 per square foot at the
end of 2007 -- since, that figure has declined to about $180 per square foot.

Looking at the country's 20 largest retail markets, Spivey showed that only two -- Westchester / So.
Connecticut and Washington D.C. -- have seen an increase in the average retail sale price per square foot
over the last year. The markets that have seen the biggest drop during this time are South Florida (-
49%), Detroit (-39.8%), Inland Empire (-39.5%), Boston (-36.9%) and Chicago (-34.5%). In general,
said Spivey, "the larger markets appear to be getting hit less hard than the rest of the country in terms of
price declines."

SALES TRANSACTION ACTIVITY and VOLUME

During 2007, CoStar recorded between 2,000 and 2,100 retail property transactions each quarter. Since,
that rate of transactions has dropped by about half, with barely more than 1,000 transactions recorded in
the latest quarter. Looking at total retail square footage sold, the drop in activity is more drastic -- down
about 74% from its peak. On a dollar volume basis, the number is sobering -- down 79% from the highs.

With the lack of available credit in the marketplace and the halt of CMBS activity, Spivey explained that
the bigger deals -- typically institutional Class A shopping center sales -- have been hit the hardest.
Transaction activity involving sales of $5 million or less have held up a little better. Looking at the number
of transactions, during 2007, we saw between 1,700 and 1,800 general retail building transaction per
quarter -- in the latest quarter, activity was down to about 950 transactions. Comparatively, activity is
down by about 83% on transactions of $20 million or higher.

Looking at retail sales transaction activity so far in 2009 across the nation's 20 largest markets, Spivey
showed that most markets have seen between a 40% and 75% decline in sales activity over the same
period in 2008. Among these, Tampa, Dallas, South Florida, Westchester, and Houston have seen the
biggest drop offs in activity. On a transaction volume basis for the 20 largest markets so far in 2009,
Spivey showed Los Angeles, Chicago, Atlanta, Long Island and Northern New Jersey at the top -- all
recording transaction volume between $638 million and $863 million during this period.

In a new statistical analysis backing up the drop off in sales $20 million or larger, Spivey tracked the
average price of an average retail sale dating back to 1995. With the historical average being $1.9 million,
a peak of about $3.5 million was hit in late 2005, hovered around $3 million in late 2007 and since has
dropped to the current average of about $1.5 million.

TIME ON MARKET
The average time a retail property spends on the market for sale continues to hamper pricing and volume.
"More and more properties are being withdrawn from the market," said Spivey, showing that in the latest
quarter, owners pulled about $9.5 billion in retail sale listings off the market, which compares to a pre-

Copyright (c) 2009 CoStar Realty Information, Inc. All rights reserved.
CONTINUED: Q3 Retail Real Estate Report: Better but Not Out of the Woods Yet
recession norm of about $6.5 billion pulled off the market quarterly.

For those properties that aren't pulled off the market, Spivey showed the direct correlation between the
sale price/asking price ratio declining the longer a retail property spends on the market. Since 2006, the
average days a retail property spends on the market for sale has increased from about 200 days to 280
days and during that time the sale price/asking price ratio has declined from about 91% to 85%.

(Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to CoStar's Retail
News Roundup, a weekly column covering retailer expansions and new concepts, store closings,
bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and
sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every
week in the national news and retail news sections of our web site, you may also receive the Retail News
Roundup for free via email by requesting to be added to the distribution list by contacting senior editor,
Sasha Pardy at spardy@CoStar.com Also, click here to subscribe to CoStar's dedicated Retail RSS Feed.

Copyright (c) 2009 CoStar Realty Information, Inc. All rights reserved.