United States Q The sounds of silence: low construction bodes well for retail

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1 Retail Outlook United States Q The sounds of silence: low construction bodes well for retail

2 Demand for retail space packs punch thanks to strategic development KEY TAKEAWAYS FROM THIS QUARTER S REPORT: CONSTRAINED SUPPLY ADDITIONS TRANSLATES TO CYCLICALLY LOW VACANCIES Third-quarter vacancy of 5.1 percent sits 100 basis points below its level ten years ago, at the height of performance. Net absorption for the quarter is holding momentum, at 33.4 million square feet. Chicago s retailers make a comeback, absorbing just under 2.0 million square feet of space the highest among major s. Cautious construction activity resulted in only 14.9 million square feet delivered during the quarter, which helped push down vacancies a further 20 basis points from the previous quarter. The top Western s as well as Hawaii seem to show particular restraint, with San Francisco, Seattle, Orange County and San Diego all having construction levels under 1.0 million square feet in the third quarter. POP-UPS AND SALES GROWTH WILL MAKE THE HOLIDAYS MERRY AND BRIGHT IN 2016 Year-to-date store closure GLA totaled approximately 90.8 million square feet, compared to 38.6 million square feet for the same period in 2015 a 135 percent increase. Notwithstanding these headline closures, retail on a whole will see more space absorbed than will be closed. NRF predicts holiday sales will climb 3.6 percent as a result of solid fundamentals, including steady job and income gains percent of shoppers surveyed will spend more than $750 this holiday season, with younger consumers budgeting less and older consumers budgeting more Pop-up stores contribute approximately $50.0 billion to annual U.S. retail sales, according to data from PopUp Republic. Pop-ups opening up this holiday season include Google, which opened up its pop-up store in SoHo and will showcase virtual reality areas, Google Home features and Pixel phones. MAJOR MARKETS SEE MIXED PERFORMANCE FOR MALL AND POWER CENTER DEMAND Hawaii malls have absorbed over 1.2 million square feet of space and rents have increased by 24.9 percent. In fact, over the past two years, malls have accounted for 66.1 percent of total net absorption in the. The Texas s were frontrunners in power center absorption during the third quarter. Over the past four quarters, Dallas power center net absorption totaled over 872,000 square feet, while Houston s absorption over the last four quarters totaled over 765,000 square feet. Atlanta and Houston are seeing the greatest level of shopping center development (among JLL-tracked s), each with over 1.0 million square feet of space under construction. 2

3 Rents yet to catch up with tremendous vacancy improvement TOTAL U.S. Type Total s.f. Total Vacancy YTD Net Q Absorption Avg Rent QOQ% Chg YOY % Chg* General Retail 5,220,247, % 47,903,530 $ % 4.8% Malls 890,195, % 1,958,205 $ % 3.8% Power Centers 747,194, % 172,100 $ % 6.2% Shopping Centers 3,509,266, % 32,514,995 $ % 1.6% Specialty Centers 82,579, % 700,314 $ % 0.8% Total Retail 10,449,483, % 83,249,144 $ % 3.2% Retail subtype Definition Examples General Retail Consists of single-tenant freestanding general-purpose commercial Drug stores, some groceries, streetfront urban buildings with parking retail stores Malls Includes Lifestyle Centers, Regional Malls and Super Regional Malls Primarily anchored by mass merchants, fashion and department stores Power Centers Consists of several freestanding anchors with minimal small tenants: Primarily anchored by big-box tenants and 250, ,000 s.f. discount supercenters Shopping Includes Community Centers, Neighborhood Centers and Strip Centers Centers Primarily anchored by groceries and local services Specialty Centers Consists of the combined retail center types of Airport Retail, Outlet Center and Theme/Festival Center Primarily anchored by manufacturers and retailers outlets Total Retail All retail building types in both single-tenant and multi-tenant buildings, including owner-occupied buildings All retail The JLL retail property clock demonstrates where each sits within its real estate cycle. Markets generally move clockwise around the clock, with s on the left side of the clock generally landlord-favorable and s on the right side generally tenant-favorable. All of the s have now moved to landlord-favorable, as rents gradually head upward and vacancy continues to contract. Most of the major metros including Dallas, Boston, San Francisco, Miami, New York and Houston have moved to a peaking as demand grows ahead of new supply additions. Once demand and supply reach equilibrium, the clock should strike midnight for most s. MAJOR RETAIL MARKETS IN PEAKING QUADRANT IN 2016 Dallas, Boston, New York Metro, Miami, Houston, San Francisco Hawaii Washington DC, Los Angeles Orange County, United States Seattle, Orlando, Atlanta, Peaking Rising Falling Bottoming San Diego, Chicago 3

4 AS CONSTRUCTION REMAINS RESTRAINED, GAP BETWEEN ABSORPTION AND DELIVERIES WIDENS Net absorption s.f. Deliveries s.f. Million square feet YTD 2016 VACANCY NOW BELOW PRE-RECESSION LOW The vacancy recovery in the U.S. retail is complete; third-quarter vacancy of 5.1 percent sits 100 basis points below its level ten years ago, at the height of performance. Net absorption for the quarter is holding momentum, at 33.4 million square feet a 13.1 percent increase from the third quarter in Cautious construction activity resulted in only 14.9 million square feet delivered during the quarter, which helped push down vacancies a further 20 basis points from the previous quarter. Rents, however, have held out on a full recovery, current levels being approximately 5.0 percent below the last cycle's peak. This is largely due to lower store productivity rates than pre-recession levels. However, given that income and household growth are outpacing retail development, rents should approach their pre-recession levels in the next year. More major s are approaching their cyclical peaks, a trend that should continue for another year or so, before fundamentals start to soften. WHILE RENTS HAVE RISEN IN THE PAST TWO YEARS, THEY REMAIN BELOW PEAK Change in average asking rents, YOY 1.2% 7.9% 3.8% -2.9% -3.1% -4.6% -0.4% -6.7% -11.6% -11.0% PRIMARY MARKETS SECONDARY MARKETS Atlanta Boston Chicago Dallas Houston Los Angeles Miami-Dade County New York City San Francisco Washington, DC Hawaii Orange County Orlando San Diego Seattle 4

5 CHICAGO MAKES A COMEBACK After the repercussions from the Dominick s closings in 2013, Chicago has fought to absorb the space vacated by the big box. In the third quarter of 2016, Chicago s retailers absorbed just under 2.0 million square feet of space the highest among major s. Mariano s, Meijer, Walmart, Stone City Kitchen & Bath Design Center and Hobby Lobby have all expanded in the area in recent quarters. Smaller retailers have also been active, absorbing approximately 900,000 square feet per quarter in With construction relatively low-key, Chicago should continue to see sustained improvements in vacancy and rent growth through Dallas and Houston also remain frontrunners in retail demand, with a combined 3.4 million square feet absorbed during the quarter. NET ABSORPTION BY RETAIL SUBTYPE Q Absorption in millions s.f General Retail Malls Power Centers Shopping Centers Specialty Centers VACANCY RATES CONTINUE TO HEAD DOWNWARD In all of the United States, vacancy for general/freestanding retail saw the greatest decline of 70 basis points, year over year. This aligns well with the high demand for urban retail space seen over the last few years. High-end urban retail space, especially, is seeing robust demand from retailers like Neiman Marcus and Saks Fifth Avenue, both of which have already signed on as anchor tenants for major construction projects under way in New York and Miami. Mall vacancy inched down a mere five basis points, year over year, as absorption has strained to keep ahead of deliveries, barely succeeding with a surplus of a mere 235,000 square feet over the last four quarters. Shopping center vacancy compressed by 63 basis points. Due to negative net absorption in the third quarter, power centers saw vacancies rise 24 basis points from the same period in YOY VACANCY COMPRESSION BY RETAIL SUBTYPE 50.0 General Retail Mall Power Centers Shopping Centers Specialty Centers 24 In bps Total U.S. 5

6 ALL QUIET ON THE WESTERN FRONT? The overbuilding which led to the huge fallout especially for big boxes during the most recent recession has left an indelible impression on developers, or so it seems. Construction, although rising since the end of the recession, remains considerably below the levels seen in the last cycle a factor that has helped bolster retail fundamentals, especially vacancy rates. In fact, current construction levels represent 0.7 percent of total GLA, compared to 2006, where space under construction totaled 2.0 percent of all inventory. The top Western s as well as Hawaii seem to show particular restraint, with San Francisco, Seattle, Orange County and San Diego all having construction levels under 1.0 million square feet in the third quarter. Consequently, these s are all enjoying vacancy rates below the national average, and fundamentals should continue to improve for the next several quarters. The space that is being built largely consists of freestanding retail (52.0 percent), much of which will take the form of urban or high-end mixed-use centers, most notably in New York and Miami. In fact, Brickell City Centre, a $1.05 billion mixed-use development in the heart of Miami, has just opened and will have residential and office towers, a hotel and prime retail and dining options, featuring cutting-edge design and sustainable architecture. Tenants opening their doors in the project include Lululemon, Agent Provocateur, Bally and Suit Supply. Q UNDER CONSTRUCTION (IN MILLIONS OF SQUARE FEET) S.F. UNDER CONSTRUCTION BY RETAIL SUBTYPE AS OF Q Hawaii San Diego Orlando Orange County Seattle San Francisco Los Angeles Chicago Boston Washington DC Miami Atlanta Houston New York Metro Dallas s.f. under construction General Retail Under construction (m.s.f.) 36.1 Malls 12.8 Power Centers Shopping Centers Specialty Centers CONSTRUCTIONS STILL WELL BELOW PRE-RECESSION LEVELS Under construction s.f YTD

7 Pop-ups and sales growth will make the holidays merry and bright in 2016 RETAILER DEMAND STILL SIGNIFICANT DESPITE LARGE SPACE CLOSURES There has been considerable concern about the number of store closings announced in Although the number of announcements for GAFO retail is down approximately 45.0 percent from the same period in 2015, as seen in our Q2 Retail Outlook Report, the square footage of space to be closed has risen significantly. This is largely due to big closures by department stores such as Macy s and sporting goods retailers such as Sports Authority. Year-to-date store closure GLA totaled approximately 90.8 million square feet, compared to 38.6 million square feet for the same period in 2015 a 135 percent increase. Notwithstanding these headline closures, retail on a whole will see more space absorbed than will be closed. Among retail categories planning to open the greatest amount of square feet include supers, hardware stores and sporting goods retailers. Retailers with aggressive opening plans include Dick s Sporting Goods, Kohl s, Charming Charlie, Fresh City Market, Ace Hardware and ipic Theatres. ALTHOUGH RETAIL SPACE BEING CLOSED IS HIGH, NET ABSORPTION REMAINS ROBUST Net absorption (58.9) (55.3) (71.2) (68.7) (56.0) (33.5) (24.5) (62.0) (41.4) (90.8) (132.2) YTD 2016, ICSC Announced store closings GAFO (GLA) CASH REGISTERS WILL STILL JINGLE THIS HOLIDAY Retail sales showed modest year-over-year growth of 2.7 percent in September (3.4 percent excluding gas stations), which, while unimpressive, is consistent with retailers selling a lot of merchandise. However, on a more positive note, growth included several discretionary categories such as building supply stores and restaurants. Apparel stores have been impacting by falling department store sales and store closures. While the U.S. election introduced greater uncertainty for sales growth for the remainder of the year, NRF predicts holiday sales will climb 3.6 percent, as a result of solid fundamentals, including steady job and income gains. Results from our Retail 2016 Holiday Survey show that many consumers especially Boomers will spend big this holiday season. In fact, 34.5 percent of shoppers surveyed will spend more than $750 this holiday season. Younger consumers are budgeting less; more than 60.0 percent of millennials and Gen Xers rank low prices as a priority when choosing where to shop; baby boomers and consumers over 70 will focus on quality when making their shopping choices. RETAIL SALES SEES MODEST YEAR-OVER-YEAR GROWTH 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 Jan 2015 Jul 2015 Jan 2016 Jul 2016 Source: Economy.com Retail Sales chg YOY 7

8 POP GOES THE HOLIDAY SHOP As the holiday season approaches, specialty, theme and gift retailers are once again popping up across the United States. Pop-ups appeal to consumers for several reasons, including unique product offerings, more personal shopping experience, support of local businesses and high-quality goods. Pop-ups not only promote brand awareness and engagement for retailers, but they can also provide a strong boost to sales. In fact, pop-up stores contribute approximately $50.0 billion to annual U.S. retail sales, according to data from PopUp Republic. Pop-ups opening up this holiday season include Google, which opened up its pop-up store in SoHo and will showcase virtual reality areas, Google Home features and Pixel phones. Wet Seal is also opening 13 pop-up stores this holiday in nine states, including Illinois, Florida, Georgia and Pennsylvania. CONSUMERS SHOP AT POP-UP STORES TO FIND UNIQUE, SEASON-SPECIFIC PRODUCTS % of respondents 61.0% 39.0% 36.0% 34.0% 30.0% Seasonal products Unique services Local shopping Optimal pricing Fun experience Source: PopUp Republic OTHER POP-UP STORE EXAMPLES American Girl is opening seven temporary locations in s such as, Portland and Detroit. Nanette Lepore is opening up a holiday pop-up shop on 35th Street, New York. Bailey44 and Ali & Jay are both opening up 1,500-square-foot holiday pop-up stores in Santa Monica Place. Reid's Fine Foods will open up a pop-up shop in North Carolina, featuring their signature product, gift baskets and holiday items. Nordstrom has launched Pop-in@Nordstrom shops which feature specially curated merchandise by Olivia Kim each month. The Row DTLA has opened a pop-up shop collection called Holiday Collective, which features 11 vendors offering apparel, home goods, food and accessories. Colorado Mills has opened six holiday pop-ups: lpaca World, Go!Calendar Games and Toys, Hickory Farms, PSI Airbrush Co, Novelty Signs and DIY Tie-Dye. The North Face has opened a temporary concept shop called Urban Exploration in San Francisco which focuses on its premium streetwear collection geared toward urban consumers. 8

9 Major s see mixed performance for mall and power center demand MALLS For malls, most of the major s have now moved to landlordfavorable. New York, San Francisco, San Diego, Los Angeles, Miami and Hawaii are seeing low vacancies and are therefore peaking. Conversely, Chicago and are bottoming s, who have yet to see meaningful vacancy compression or rent gains. San Francisco, Los Angeles, San Diego, Miami Hawaii, New York Metro Boston, Orange County, Seattle Orlando, Washington, DC, Atlanta, Dallas, United States Houston Peaking Rising Falling Bottoming Chicago, MALL NET ABSORPTION CHANGE Q (s.f.) Washington DC Orlando San Diego Miami Seattle Chicago San Francisco Orange County Houston Boston Atlanta Dallas Los Angeles New York Metro Hawaii Source: JLL Research, CoStar -170,783-94,977-39,473-20,696-14,746-7,899-2,187 2,792 20,369 28,104 30,765 35,759 55, , , , ,277 Hawaii and New York saw the greatest absorption in mall space during the third quarter. Thanks to strong retail sales, boosted by tourism, demand for space in Hawaii remains very healthy. In the past four quarters alone, Hawaii malls have absorbed over 1.2 million square feet of space and rents have increased by 24.9 percent. In fact, over the past two years, malls have accounted for 66.1 percent of total net absorption in the. In New York metro, 335,000 square feet of retail space in the World Trade Center was delivered, all of which has been leased. 9

10 POWER CENTERS San Francisco, Dallas, New York Metro As power centers have seen strong improvement over the last two years, metros are either in the peaking or rising quadrants. Washington, DC, Hawaii, Orange County, Miami, Seattle,, Houston, United States Los Angeles, Orlando, Chicago Peaking Rising Falling Bottoming Atlanta San Diego, Boston POWER CENTER NET ABSORPTION CHANGE Q (s.f.) Los Angeles Orlando San Diego San Francisco Seattle Orange County Hawaii Miami Atlanta Boston Chicago New York Metro Washington DC Dallas Houston -155, , , ,865-90,420-59,258-53,997-45,285-41, ,080 22,651 25,910 49,058 68, , ,695 The Texas s were frontrunners in power center absorption during the third quarter. Over the past four quarters, Dallas power center net absorption totaled over 872,000 square feet comfortably over deliveries of 708.0million square feet. As a result, power center vacancies fell 60 basis points in the last year to 3.0 percent, while rents inched up 3.8 percent. Houston, although seeing healthy absorption in its power centers, has a slightly different overall picture. Absorption over the last four quarters totaled over 765,000 square feet, which fell short of the 990,000 square feet delivered during the same period. As a result, although rents rose 5.4 percent, year over year, vacancies bumped up 70 basis points to 4.2 percent. However, there should be no cause for alarm, as the vacancy rate is still some 200 basis points lower than it was in 2006 at the height of the previous cycle. Source: JLL Research, Q3 2016, CoStar 10

11 SHOPPING CENTERS For shopping centers, the s on the clock are somewhat closely clustered in the rising segment, as significant improvement has only begun to manifest in recent quarters. As conditions continue to improve, more s should gradually move past nine o clock toward midnight. Dallas, San Francisco, New York Metro Houston, Boston, Miami Houston, Miami, Washington, DC, Orange County, Hawaii San Diego, Los Angeles, United States, Atlanta, Orlando, Seattle Peaking Rising Falling Bottoming Chicago SHOPPING CENTERSET ABSORPTION CHANGE Q (s.f.) New York Metro San Francisco Boston Hawaii Miami Orange County Seattle San Diego Chicago Orlando Los Angeles Washington DC Dallas Houston Atlanta 3,250 11,661 51, , , , , , , , , , , , ,343 1,073,694 1,153,641 Atlanta and Houston are seeing the greatest level of shopping center development (among JLL-tracked s); each with over 1.0 million square feet of space under construction. Atlanta, in particular, is seeing a high relative proportion of shopping center construction, accounting for 40.1 percent of all its development activity in the last quarter. On a positive note, space absorbed in this category has totaled nearly three times the amount of space delivered in the last year. Source: JLL Research, CoStar 11

12 For more information, please contact: Greg Maloney President & CEO Retail Americas greg.maloney@am.jll.com James Cook Americas Director of Research, Retail jamesd.cook@am.jll.com Keisha Virtue Senior Research Analyst Retail Americas keisha.virtue@am.jll.com About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 280 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $58.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit About JLL Research JLL s research team delivers intelligence, analysis and insight through -leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without prior written consent of Jones Lang LaSalle IP, Inc. COPYRIGHT JONES LANG LASALLE IP, INC. 2016