Research & Forecast Report SACRAMENTO | RETAIL Q3 2017 Research & Forecast Report SACRAMENTO | RETAIL Q3 2017

BIG ASORPTION AT DELTA SHORES, REST OF MARKET STABLE HEADING INTO HOLIDAYS

Net absorption was well above average for Q3, but with the majority of new occupants taking newly constructed space, the overall vacancy rate hardly budged. A number of big box vacancies remain unfilled, but new developments are pushing average asking rates, the biggest shift evident in the vicinity of and the new Delta Shores along I-5. The first new stores at these two major development sites have opened in the last 90 days or will open before the end of 2017. Meanwhile, the rest of the market has remained relatively stable, with no major retailers exiting or entering the market. Investors from outside the Sacramento market have been active, as properties in this market offer cap rates more than 100 basis points higher than Bay Area and Southern markets and more than 50 basis points above the average for the Western region.

Net Absorption Community Power >> 373,290 square feet of positive net absorption was more than Market Indicators Neighborhood Regional Specialty Strip two times the three-year rolling average per quarter. Relative to prior period 2017 Q3 2017 Q3 2017 Q3 2017 Q3

>> Roughly 60 percent of the absorption total came from new VACANCY Delta Shores tenants, including Dick’s Sporting Goods, PetSmart and Ross Dress for Less. NET ABSORPTION CONSTRUCTION Vacancy RENTAL RATE >> The overall vacancy declined 10 basis points to 9.4 percent.

>> About a dozen notable big box vacancies (including Macy’s, Note: Construction is the change in SF Under construction Sports Authority, and Borders) comprise 12.6 percent of the total vacant square footage or 1.2 percent of the total market inventory. Removing these from inventory would result in an overall vacancy rate of 8.3 percent. Summary Statistics Rental Rates Q3 2017 Regional Community Power >> The overall average asking rate has risen 1.5 percent in the Retail Market Neighborhood Regional Speciality Strip Overall last year. Vacancy Rate 9.4% 8.5% 10.0% 10.6% 9.4% >> As predicted, the biggest increase in asking rates has been Change From Q2 2017 10 10 -60 -60 -10 development-driven. We are showing a 13.4 percent year- (Basis points) over-year increase in power regional centers. Net Absorption 76,520 222,622 18,281 47,678 365,101 (Square Feet) Activity New Supply 103,090 258,532 0 0 361,622 >> Sales in Q3 totaled $204.4 million on 81 transactions, which is (Square Feet) 8.8 percent more volume than the 3-year rolling average per Under Construction 36,949 482,678 140,150 42,154 701,931 quarter. (Square Feet) >> The top buyers in the market are investment firms from the Change in Asking Rents -1% 9% -8% 1% 0% Bay Area and markets—three from the (Compared to Q2 2017) Bay Area, one from Glendale and one from Irvine.

Vacancy & Absorption Performance Absorption & Vacancy 2,000,000 18.0%

Strong positive absorption during Q3 came 16.0% 1,500,000 primarily from new occupants at the Delta 14.0% 13.4% 13.6% 13.2% 13.0% Shores power regional center being developed 11.8% 12.0% 1,000,000 VACANCY % 10.6% 10.7% along Interstate 5 in South Sacramento. A new 10.1% 10.3% 10.0% 9.4% Dick’s Sporting goods was the first to debut at 8.0% TOTAL TOTAL SF 500,000 the center, along with a PetSmart and Ross Dress 6.0%

4.0% For Less. These helped propel the new supply and 0 the absorption above last year’s total. The overall 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2.0%

0.0% vacancy rate is now at 9.4 percent, the lowest (500,000) since Q2 of 2008. While there are still some large -2.0% blocks of vacant space, the competition is tight for (1,000,000) -4.0% useable space in desirable locations. -6.0% (1,500,000) -8.0% Total Net Absorption New Supply Total EOY Vacancy Total Net Absorption New Supply Total EOY Vacancy Source: Colliers International, CoStar Rental Rates Source: Colliers International Overall average asking rates have increased 1.5 percent in the last 12 months. The segments Rental Rates where we see the biggest year-over-year growth $3.00 in rents correlate with major development projects. Downtown Commons’ first new tenants $2.80 are projected to open in Q4. Activity in the new $2.60 Downtown core will continue to be hot as the $2.40 redevelopment project at 700 K Street takes shape. $2.20

Several lease deals nearby during Q3 quoted rental $2.00 rates well over $4.00 (NNN) per square foot for $1.80 ground floor retail space within walking distance of ASKING RENTAL RATE $1.60 the . The Delta Shores development has had a similar effect on average power regional $1.40 rates in the South Sacramento submarket, except $1.20 the effect does not appear to have spilled over $1.00 to the rest of the submarket outside that center.

Overall Avg. Community Neighborhood Power Regional Specialty Strip Source: Colliers International, CoStar Overall Avg. Community Neighborhood Power Regional Speciality Strip Investment Volume Source: Colliers International Compared to Q2, sales during the most recent quarter came in 18.1 percent lower on dollar Investment Volume volume but 15.8 percent higher on square footage.

The average price for properties sold during 2017 $1,000 140 so far is $197.97 per square foot. Now seven years $900 into the current recovery cycle, prices are just 18.2 120 119 120 $800 percent below the average in 2007. 104 100

$700 TRANSACTIONS OF # 93 89 90 $600 86 The average cap rate for sales in the last 12 months 82 81 80 77 79 79 74 75 in the Sacramento market came to 6.5 percent. It $500 67 68 66 64 62 62 61 60 is no surprise that investment has originated from $400 the Bay Area and Los Angeles metros, as cap rates 45 46 $300 40

in those markets averaged 5.3 and 5.4 percent, SALES VOLUME (IN MILLIONS) $200 respectively. 20 $100

$0 0 2012 Q2 Q3 Q4 2013 Q2 Q3 Q4 2014 Q2 Q3 Q4 2015 Q2 Q3 Q4 2016 Q2 Q3 Q4 2017 Q2 Q3 YTD

Source: Colliers International, CoStar Rolling 12Rolling Month 12 Month Total $ Total $ Volume$ Volume # Transactions Transactions Source: Colliers International

3 Sacramento Research & Forecast Report | Q3 2017 | Sacramento / Retail | Colliers International Significant Market Activity Lease Transactions Q3 2017

SIGNED DATE ADDRESS SQUARE FEET TYPE SUBMARKET LANDLORD TENANT

Community Aug-17 3350 Arden Way 37,887 Neighborhood Arden/Watt/Howe Cahill Contractors California Family Fitness South Hills Shopping Center Community Shun Fat Supermarket, Aug-17 (5820 South Land Park Dr) 29,000 Neighborhood South Sacramento Monica Wong Inc. Community Sep-17 Howe Bout Arden (2100 Arden Way) 20,855 Neighborhood Arden/Watt/Howe SyWest Michaels Sales Transactions Q3 2017

SALE DATE ADDRESS SQUARE FEET SALE PRICE PRICE/SQUARE FEET SELLER BUYER

1002-1016 Riley St, Folsom (4 Aug-17 properties) 140,177 $39,683,333 $283.09 Hill Companies, LLC Nazareth Enterprises Aug-17 (14 properties) 273,240 $32,460,000 $118.80 PGIM Real Estate Robhana & Starboard Merlone Geier Sep-17 Sunrise Village (10 properties) 129,641 $24,095,000 $185.86 Gianulias Investments Management, Inc. 6029-6085 Greenback Ln, Citrus Friedkin Becker Investment Aug-17 78,632 $13,000,000 $165.33 Yeh's Development Heights Corp Koreana Development Sep-17 11051 Olson Dr, Rancho Cordova 76,158 $10,500,000 $137.87 First Acorn LLC Associates Construction Summary Q3 2017 EST. ADDRESS SQUARE FEET TYPE SUBMARKET LANDLORD TENANT DELIVERY DTown/Midtown/E Limited Century Theatres/PB Nov-17 Downtown Commons 87,640 Lifestyle Center Sac Partnership Social Del Paso Marketplace (2810 Del Community Nov-17 29,296 Natomas Buzz Oates Sprouts Paso Rd) Neighborhood Nov-17 2025-2032 Arden Way 13,241 Freestanding Arden/Watt/Howe Las Chicas LLC Buffalo Wild Wings, Chili's Community Highway 50 Nov-17 Sunridge Plaza (pad sites) 7,653 Donahue Schriber Arco, Chase Bank Neighborhood Corridor Lazy Dog, Revolutions Nov-17 Highland Village (238 Gibson Dr) 14,393 Freestanding Roseville/Rocklin Glimcher Ventures Southwest Naturopathic Q4 2017 through Q1 Delta Shores 482,678 Power Regional South Sacramento Merlone Geier Partners RC Willey, 2018 Arden Creek Town Center Community New expansion adjacent to Q1 2018 11,527 Arden/Watt/Howe Merlone Geier Partners existing PetSmart, Smart & (1730 Watt Ave) Neighborhood Final and Rite Aid Deliveries Summary Q3 2017 SQUARE DELIVERY ADDRESS TYPE SUBMARKET LANDLORD TENANT FEET Dick's Sporting Goods, Aug-17 Delta Shores 258,532 Power South Sacramento Merlone Geier Partners PetSmart, Ross Dress for Less, Regional In-N-Out Community Jersey Mike's, Café Rio, Sep-17 Howe Bout Arden 14,981 Neighborhood Arden/Watt/Howe SyWest Cream, Bonchon Employment and Tenant Demand Year-Over-Year Job Growth Government The latest data from the California Employment Development Other Services 2,800 Total Farm (900) 100 Department (EDD) shows total employment in Sacramento – Leisure & Hospitality Mining and Logging Roseville – Arden-Arcade Metropolitan Statistical Area (Sacramento 5,900 0 MSA) up 1.6 percent compared to last year. Unemployment declined Construction from 4.8 percent at the end of Q2 to 4.5 percent currently. (2,700)

Of the 15,500 net new jobs added in the last year, one-third work Manufacturing Trade, (1,500) in food service. While employment overall grew 1.6 percent, leisure Transportation & and hospitality is the fastest growing sector, up 5.9 percent year over Utilities 2,100 year. Other retail trades remained flat quarter over quarter, up 0.9 Information percent compared to a year ago. If fourth quarter holiday season is (500) the real measure of health for goods retailers, that year-over-year Educational & Health Financial Activities Services 2,100 growth will need to measure between 1.5 and 2 percent as we’ve 4,500 seen in the last five years. Professional & Source: BLS, CA Employment Development Department Business Services Source: BLS, CA Employment Development Department 3,700

4 Sacramento Research & Forecast Report | Q3 2017 | Sacramento / Retail | Colliers International Market Analysis Summary Market Total

TOTAL DIRECT YTD NET RENTABLE AVAILABILITY NET ABSORPTION UNDER SUBMARKET VACANT VACANCY ABSORPTION BUILDING AREA RATE SF CONSTRUCTION SQUARE FEET RATE SF Community Neighborhood 37,111,026 3,513,837 9.4% 10.9% 84,709 518,845 36,949 Power Regional 12,604,096 1,074,978 8.5% 10.4% 222,622 321,380 482,678 Specialty 2,950,721 272,116 10.0% 12.2% 18,281 10,154 140,150 Strip 8,917,805 948,240 10.6% 12.9% 47,678 90,888 42,154 Overall Market 61,583,648 5,809,171 9.4% 11.2% 373,290 941,267 701,931 Quarterly Comparison & Totals

TOTAL DIRECT YTD NET RENTABLE AVAILABILITY NET ABSORPTION UNDER QUARTER VACANT VACANCY ABSORPTION BUILDING AREA RATE SF CONSTRUCTION SQUARE FEET RATE SF 3Q-17 61,583,648 5,800,795 9.4% 11.2% 365,101 941,267 701,931 2Q-17 61,222,026 5,804,274 9.5% 11.1% 74,027 74,027 1,063,553 1Q-17 61,174,826 5,831,101 9.5% 11.2% 503,450 765,432 1,096,360 4Q-16 61,141,990 6,301,715 10.3% 11.5% (4,441) 117,533 299,357 3Q-16 61,013,958 6,169,242 10.1% 11.5% 276,971 121,974 373,189

New Construction and Outlook Retail developers delivered a total 361,622 square feet of new buildings in Q3. That is the highest total since Q2 of 2009. There were no new construction starts during the quarter, so the total under construction is a little over 700,000 square feet. A number of smaller developments are scheduled to be finished by the end of the year and the first new shops at Downtown Commons will open in the fourth quarter, but there will likely be more than 500,000 square feet under construction as we go into 2018. SyWest completed an additional 14,981 square feet at the Howe ‘Bout Arden center, with two restaurants now occupying (Jersey Mike’s and Café Rio) as well as CREAM ice cream sandwiches, AhiPoki Bowl and Bonchon Chicken already signed. Work transitioned to renovating an existing space for Michaels, and a second movie theater was announced during Q3. Cinemark aims to complete the Century Arden Movie Bistro by summer 2018. The 1.3 million square foot Delta Shores development reached a major milestone, as the first major retailers opened during Q3. With the completion of Dick’s Sporting Goods, PetSmart and Ross Dress For Less, the center is nearly a third complete. Walmart will open during the first part of Q4, and RC Willey is scheduled for a January debut.

New multi-tenant building at 1600 Ethan Way Howe Bout Arden center 14,981 SF, completed September 2017

5 Sacramento Research & Forecast Report | Q3 2017 | Sacramento / Retail | Colliers International Market Analysis

Sacramento Retail Submarket Analysis Q3 2017

TOTAL DIRECT YTD NET RENTABLE AVAILABILITY NET ABSORPTION UNDER SUBMARKET VACANT VACANCY ABSORPTION BUILDING AREA RATE SF CONSTRUCTION SQUARE FEET RATE SF Arden / Howe / Watt Community Neighborhood 3,674,777 488,986 13.3 % 12.7 % 6,604 105,924 - Power Regional 1,220,566 374,901 30.7 % 33.2 % (7,438) 5,093 - Strip 1,130,319 120,344 10.6 % 11.5 % (601) 4,813 13,241 Auburn / Loomis Community Neighborhood 1,074,562 48,826 4.5 % 6.7 % 0 11,327 - Power Regional 409,734 8,350 200.0% 280.0% 0 9,500 - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 343,721 24,762 7.2 % 8.6 % 2,191 13,631 - Carmichael / Fair Oaks Community Neighborhood 1,350,507 92,300 6.8 % 11.1 % 3,899 9,356 - Power Regional - 0 0.0% 0.0% 0 0 - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 538,212 51,477 9.6 % 10.3 % (1,763) 16,543 - Citrus Heights / Orangevale Community Neighborhood 3,395,838 543,272 16.0 % 18.5 % (32,844) 33,456 - Power Regional 337,725 51,209 15.2 % 16.3 % 0 0 - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 1,019,974 138,623 13.6 % 14.7 % 2,001 12,823 - Davis Community Neighborhood 999,467 57,289 5.7 % 7.5 % 3,936 (23,139) - Power Regional - 0 0.0 % 0.0 % 0 0 - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 56,122 8,437 15.0 % 15.0 % 3,550 1,265 - Downtown / Midtown / East Sac Community Neighborhood 547,023 2,889 0.5 % 0.8 % 0 (1,367) - Power Regional - 0 0.0 % 0.0 % 0 0 - Specialty 420,337 12,720 3.0 % 13.2 % 0 (12,720) 140,150 Strip 453,468 31,405 6.9 % 19.6 % 3,000 9,268 14,520 El Dorado Community Neighborhood 1,511,465 93,017 6.2 % 8.0 % 8,452 5,131 - Power Regional - 0 0.0 % 0.0 % 0 0 - Specialty 596,183 24,076 4.0 % 9.7 % (320) 4,243 - Strip 387,813 40,833 10.5 % 15.2 % 3,174 (1,017) - Elk Grove Community Neighborhood 2,623,975 96,130 3.7 % 4.5 % 15,127 10,548 - Power Regional 1,267,429 44,900 3.5 % 4.3 % 0 11,115 - Specialty 190,000 25,836 13.6 % 13.6 % 0 0 - Strip 404,497 36,983 9.1 % 10.7 % 4,610 (2,523) - Folsom Community Neighborhood 2,505,629 150,218 6.0 % 7.1 % (6,707) (8,688) - Power Regional 792,569 9,612 1.2 % 1.8 % (4,462) (3,272) - Specialty 1,080,931 113,191 10.5 % 9.9 % 7,932 8,991 - Strip 380,166 25,489 6.7 % 8.6 % 14,272 10,920 -

The information contained in this report was provided by sources deemed to be reliable, however, no guarantee is made as to the accuracy or reliability. As new, corrected or updated information is obtained, it is incorporated into both current and historical data, which may invalidate comparison to previously issued reports. Results include all retail space located in any type of shopping center or regional mall in all core areas of Sacramento, Placer, El Dorado and Yolo Counties.

*Average rents used reflect the most recent asking rents available.

6 Sacramento Research & Forecast Report | Q3 2017 | Sacramento / Retail | Colliers International Market Analysis Sacramento Retail Submarket Analysis Q3 2017

TOTAL DIRECT YTD NET RENTABLE AVAILABILITY NET ABSORPTION UNDER SUBMARKET VACANT VACANCY ABSORPTION BUILDING AREA RATE SF CONSTRUCTION SQUARE FEET RATE SF Highway 50 Community Neighborhood 2,797,214 386,809 13.8 % 17.9 % 40,020 205,549 7,653 Power Regional - 0 0.0 % 0.0 % 0 0 - Specialty 88,945 13,974 15.7 % 16.7 % 6,729 6,729 - Strip 480,337 59,858 12.5 % 12.1 % 891 6,985 - Lincoln Community Neighborhood 495,117 36,901 7.5 % 7.5 % 1,969 1,664 - Power Regional 690,493 33,732 4.9 % 4.9 % 0 (1,600) - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 42,132 4,135 9.8 % 9.8 % 3,165 (4,135) - Natomas / Northgate Community Neighborhood 1,459,916 100,026 6.9 % 8.5 % 16,328 20,022 29,296 Power Regional 1,444,855 123,427 8.5 % 14.0 % 12,700 18,500 - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 197,713 7,559 3.8 % 6.1 % 1,981 14,650 - Rio Linda / N Highlands Community Neighborhood 2,208,720 272,600 12.3 % 14.8 % 3,144 (1,158) - Power Regional - 0 0.0 % 0.0 % 0 0 - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 700,746 93,982 13.4 % 15.2 % 4,147 19,356 - Roseville / Rocklin Community Neighborhood 5,093,216 473,844 9.3 % 11.6 % 27,624 87,715 - Power Regional 3,611,458 142,018 3.9 % 2.8 % (5,000) 74,023 - Specialty 436,178 6,895 1.6 % 4.4 % 5,467 6,719 - Strip 1,169,345 171,587 14.7 % 17.0 % (8,802) (36,971) 14,393 South Sacramento Community Neighborhood 5,296,331 519,583 9.8 % 10.0 % 1,031 49,622 - Power Regional 1,146,692 168,449 14.7 % 18.6 % 223,886 223,886 482,678 Specialty 138,147 75,424 54.6 % 44.9 % (1,527) (3,808) - Strip 1,320,981 104,863 7.9 % 10.8 % 6,299 14,017 - West Sacramento Community Neighborhood 862,982 25,658 3.0 % 3.1 % 2,500 9,637 - Power Regional 811,380 10,705 1.3 % 2.2 % 2,936 (10,705) - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 115,551 8,896 7.7 % 6.7 % 4,183 7,183 - Woodland Community Neighborhood 1,214,287 85,489 7.0 % 8.3 % (6,374) 3,246 - Power Regional 871,195 107,675 12.4 % 13.0 % 0 4,340 - Specialty - 0 0.0 % 0.0 % 0 0 - Strip 176,708 19,007 10.8 % 10.8 % 5,380 4,080 -

7 Sacramento Research & Forecast Report | Q3 2017 | Sacramento / Retail | Colliers International MARKET CONTACT: 554 offices in Randy Dixon Managing Director | Sacramento countries on +1 916 929 5999 68 [email protected] continents 6 REGIONAL AUTHORS: Ken Johnson Research Manager | Sacramento ANZ: 192 +1 916 563 3065 United States: 153 [email protected] Canada: 34 Tim Shaw Latin America: 24 Research Specialist | Sacramento Asia Pacific:39 +1 916 563 3043 [email protected] EMEA: 112 CONTRIBUTORS: Colliers International | Sacramento 301 University Avenue, Suite 100 $2.6 Sacramento, CA | United States billion in +1 916 929 5999 annual revenue

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