The Amenitization of Retail

Urban Land Institute October 10, 2018

Cushman & Wakefield

Garrick H. Brown Vice President, Retail Intelligence [email protected] What Gets Shoppers to Show Up… The three driving forces behind bricks and mortar retail

Amazon: The 4,000 Pound Gorilla

What was the original value proposition of eCommerce to the consumer? Value Convenience What is it today? Convenience

Value Experience

Source: Cushman & Wakefield Research eCommerce to newCommerce How online keeps evolving…

1995 - 2000 2001 - 2009 2010 - Present 2015 - Present 2017 - ?

The Early Days Pure Play The Age of Omnichannel newCommerce Years Amazon Age Age Desktop Desktop Desktop Desktop Desktop Initial Launch of Mobile Mobile Mobile Mobile eCommerce Tablets Tablets Tablets Post Tech Wreck Ramp ? Rise (and Fall) Up of New Pure Play Amazon Distribution Amazon Dominance of Early Players Internet eCommerce Strategy: Speed to Continues Seamless Integration Consumer over Tax of Omnichannel (now Distribution Strategy: Retailers Still Building a GIVEN for Retail Tax Advantages Amazon Dominance eCommerce Survival) over Speed Infrastructure Retailers Rush to Build eGroceries eCommerce Emergence of Bricks Infrastructure to Clicks Movement ePharma

Source: Cushman & Wakefield Research What is Happening with American Retail? Don’t you know there a “retail apocalypse” under way?

The Mainstreaming of Doom

There are real challenges, but the perception is becoming worse than the reality.

Unfortunately those perceptions will contribute to the reality by harming healthier retailer and REIT values.

Bloomberg launched an online interactive game in February 2018 where the goal is to save a dying mall.

Source: Cushman & Wakefield Research So Why the Gloom? Is US retail really doomed? Consumer Confidence

February reading of 130.8 was the highest in 17 years!

Source: Cushman & Wakefield Research The Evolution of the Third Place… The third place fills a deep and abiding human NEED…

The Father of the American Mall

Viktor Gruen

First Place: “Good design equals good Home profits. The more beautiful the displays and surroundings, the longer consumers want to stay in a shop. The more time a Second Third Place: shopper spends in a store, the more they will spend.” Place: Where we Work Commune

Source: Cushman & Wakefield Research Look Familiar? Understand Live/Work/Play is a Product of Environment

Technology is Redefining ALL

Technology itself is changing at a breakneck pace.

Live And it is changing how we want to experience live/work/play.

But retailers, landlords, Work Play developers and investors had better be students not just of technology but of psychology, anthropology and culture if they want to have a hope of truly understanding the consumer impacts.

Source: Cushman & Wakefield Research What Technology is Really Doing… Live/Work/Play Imbalances Driving Amenities Arms Race

Technology is Redefining ALL

Technology itself is changing Live at a breakneck pace.

And it is changing how we want to experience live/work/play. Work Play But retailers, landlords, developers and investors had better be students not just of technology but of psychology, anthropology and culture if they want to have a hope of truly understanding the consumer impacts.

Source: Cushman & Wakefield Research Amenities Arm Race Other product types need retail more than ever before

The “Halo Effect”

Amenity Retail Retail Personal Needs Drug Stores Grocery Stores Personal Services Restaurants Bars Office Multifamily Hospitality Food Halls Entertainment Medical Retail Health/Fitness Clubs Large Format Omni Small Format Niche

Source: Cushman & Wakefield Research Source: Cushman & Wakefield Research Retail Rebound Underway? Recent positive developments… All of these will help retailers Positive Signs for Retail Real Estate? in 2018. But will these factors help slow closures and 1. Great underlying consumer fundamentals; will they improve in bankruptcies heading into 2018? 2018? • Unemployment • Wage growth • Consumer Confidence 2. Strongest holiday season since the Great Recession (+5.5%). 3. Trump tax cuts • Corporate impact • Consumer impact 4. Did a landlord action just slow a strategic closure (Simon v. Starbucks)? 5. U.S. Supreme Court decision on collection of internet sales taxes?

Source: Cushman & Wakefield Research Structural Issues in Retail What’s really driving today’s wave of consolidation? Recent positive economics are helpful, but won’t save many troubled retailers. 1. Over-retailed marketplace.

2. Acceleration of eCommerce.

3. Race to the Bottom Discounting (Rise of Off-Price) • The rise of off-price, growth of dollar stores, discounters, etc.

4. Shifting Consumer Spending Patterns. • Millennials spending less than previous generations. • Millennials spending differently (experience over stuff).

Source: Cushman & Wakefield Research eCommerce Acceleration Impact on Store Closures Closures rising due to eCommerce, but other factors as well… 14,000 16.0% What’s Really Happening (it’s not just about Amazon)? 12,000 14.0% Convergence of Four Factors: 12.0% 10,000 1. Acceleration of 10.0% newCommerce 8,000 2. Over Retailed Marketplace 8.0% 3. Race to the Bottom Discounting (Rise of Off- 6,000 6.0% Price) 4. Shifting Consumer 4,000 Patterns (Millennials 4.0% Spending Differently than Past Generations) 2,000 2.0%

0 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 (F) 2019 (F) 2020 (F) Major Chain Closures Forecast Major Chain Closures eCommerce % of Total Retail Sales

Source: Company filings, Department of Commerce, Cushman & Wakefield Research eCommerce/Retail Real Estate Disruption Meter as of Q2 2018

Retail Real Estate Disruption Meter Cumulative eCommerce Impact on Retail Real Alcohol/Package Goods Stores Estate by Category: 2018 Amusement Concepts *Apparel (Luxury) No/Minor Disruption *Apparel (Mid-Price) *Apparel (Off-Price) Modest Disruption Art Galleries Arts & Crafts Stores Disruption Auto Parts Auto Sales Major Disruption Automotive Repair & Service Devastating Impact Bakeries Bars, Pubs & Nightclubs Bicycle Stores & Repair

*Apparel includes all categories, as Boating & Boat Supplies well as accessories. Book Stores Bridal Shops Cameras & Video Equipment Car Audio Cellular Stores & Cellular Repair 0.0 1.0 2.0 3.0 4.0 5.0

Source: Cushman & Wakefield Research eCommerce/Retail Real Estate Disruption Meter as of Q2 2018

Retail Real Estate Disruption Meter Cumulative eCommerce Impact on Retail Real Childcare/Learning Centers Estate by Category: 2018 Computer Repair Consumer Electronics No/Minor Disruption Convenience Stores/Gas Stations Department Stores Modest Disruption Dollar Stores Disruption Drug Stores Dry Cleaning/Tailoring Major Disruption Entertainment Concepts Devastating Impact Eye Care/Optical Stores Farm Supply/Ranch Stores Film Developing Financial Services (Insurance/Tax) Financial Services (Lending/C.C.) Financial Services (Banking) Food Specialty Retail Formalwear

0.0 1.0 2.0 3.0 4.0 5.0

Source: Cushman & Wakefield Research eCommerce/Retail Real Estate Disruption Meter as of Q2 2018

Retail Real Estate Disruption Meter Cumulative eCommerce Impact on Retail Real Garden Stores Estate by Category: 2018 Gift Shops/Cards/Stationary Stores Grocery Stores No/Minor Disruption Hair & Nail Salons Hardware Stores (Small Format) Modest Disruption Health & Beauty (Cosmetics, Etc.) Health Clubs (Gyms, Etc.) Disruption Home Improvement/DIY Mega Stores Jewelry Stores Major Disruption Laundromat Devastating Impact Luggage Stores Medical Retail Music Stores—Instruments Music Stores—Records, DVDs & CDs Office Supplies Party Supplies Pawn Shops Pet Stores (Pets & Supplies) Pool & Spa Stores 0.0 1.0 2.0 3.0 4.0 5.0

Source: Cushman & Wakefield Research eCommerce/Retail Real Estate Disruption Meter as of Q2 2018

Retail Real Estate Disruption Meter Cumulative eCommerce Impact on Retail Real Portrait Studios Estate by Category: 2018 Restaurants (All Types) Shipping, Packing & Postal Stores No/Minor Disruption Shoe Repair Shoe Stores Modest Disruption Sign & Banner Stores Spas (Day Spa, Massage Concepts, Etc.) Disruption Sporting Goods Superstores/Category Killers Major Disruption Tattoo Parlors Devastating Impact Theaters Thrift Shops/Consignment Shops Tire Stores Tobacco, Cigarettes, Vape Shops Toy Stores Travel Agencies Video Game Stores Video Rental Stores Warehouse Club Stores 0 1 2 3 4 5

Source: Cushman & Wakefield Research What’s Up With Pharma? Will this be the next category disrupted? Walgreen’s + Rite Aid (Half)

Albertson’s + Rite Aid (the Other Half) DEAL DEAD What Next for Rite Aid?

CVS + Aetna

Amazon + JP Morgan + Berkshire Hathaway

Source: Cushman & Wakefield Research Major Retailer Bankruptcies

2017: Major retailer bankruptcies 2017 2018

Aerosoles Charlotte Olympia Major Retailer Bankruptcies Alfred Angelo Agaci BCBG Max Azria Bon Ton 40 Bob’s/Eastern Mountain Kiko USA Central Grocers Walking Company 35 Charming Charlie Claire’s Gander Mountain Southeastern Grocers Gordman’s Nine West 30 Gymboree Bertucci’s HHGregg Brookstone 25 Limited National Stores Marbles: The Brain Store Gump’s 20 MC Sports Real Mex Papaya Clothing Mattress Firm Payless 15 Perfumania RadioShack/General Wireless 10 Romano’s Macaroni Grill Rue 21 Sheikh Shoes 5 Sports Zone Toys R Us 0 Traffic Shoes 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 True Religion Vanity Major Chain Bankruptcies Forecast Total Vitamin World Wet Seal

Source: Cushman & Wakefield Research Danger Zone Bankruptcies will persist in 2018 and beyond

2018 Bankruptcy Watch 99 Cents Only Potential Vulnerabilities Ahead Academy Sports Apparel & Department Stores Anna’s Linens (National) 6,000 Charlotte Russe 4,878 David’s Bridal 5,000 Eddie Bauer (Everest) 4,000 Factory 2 U (National) 3,000 Fresh Market, The Guitar Center 1,667 2,000 1,430 Hot Topic 1,020 1,000 554 575 564 J. Crew 335 364 300 86 187 Lands’ End 0 Neiman Marcus Payless (again?!) PetSmart Savers (Evergreen) Sears Spencer’s Gifts (SSH) Spirit Stores (SSH) Value Village (Evergreen) Number of Units Steak ‘n’ Shake (Biglari) Vince

Source: Cushman & Wakefield Research and Moody’s Analytics The Problem for These Retailers? It’s leveraged buyout debt… not relevance or eCommerce Over the past 20 years, we Albertson’s Belk Charlotte Russe increasingly saw private equity groups borrow money to JoAnn Fabrics Shopko Hot Topic acquire retailers and then put that debt on the retailer balance sheets. This risky Chuck E. Cheese Staples 99 Cents Only practice, known as leveraged buyouts, is creating issues for Pep Boys GNC The Fresh Market many relevant retailers today.

Hudson’s Bay Talbots PetSmart Many of the latest Company bankruptcies (Toys R Us, etc.) Calceus (Cole Haan) Petco have come about from this Guitar Center practice. Academy Sports David’s Bridal Neiman Marcus J. Crew Lands’ End

Source: Cushman & Wakefield Research and Moody’s Analytics Major Chain Store Closures 2017: Surpassed great recession levels

What’s Really Happening (it’s not Major Chain Store Closures just about Amazon)? 14,000 Convergence of Four Factors:

12,000 1. Acceleration of newCommerce 2. Over Retailed Marketplace 10,000 3. Race to the Bottom Discounting (Rise of Off-Price) 4. Shifting Consumer Patterns 8,000 (Millennials Spending Differently than Past 6,000 Generations)

4,000

2,000

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Major Chain Closures Forecast Major Chain Closures

Source: Cushman & Wakefield Research Top Retail Chains in Contraction Mode 2018: Announced store closure plans

More of Same in 2018 CVS Nine West Applebee's Destination Maternity Top Contraction Categories: Claire's* Aaron Brothers GameStop* Apparel Kmart Department Stores Footlocker Carter's Media (Books, Video, Music, Charming Charlie Etc.) H&M The Gap Office Supplies Signet Jewelers Mattress Firm* Sporting Goods Sears Consumer Electronics Teavana H&R Block Walgreens Ascena (Ann Taylor, LOFT, dressbarn, maurices) Subway Toys R Us 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Announced Closures 2018 Potential Closures 2018

Source: Cushman & Wakefield Research *Estimated likely closures based on market intel Top Retail Chains in Growth Mode 2018: Announced new store openings

More of Same in 2018 Major Chain Openings 2018 Ross Dress for Less Top Expansion Categories: Carter's/OshKosh Bank of America (retail banking) Tim Horton's* Dollar Stores Wingstop* Chick Fil-A* Discount Grocery Taco Bell* Domino's Pizza* Off-Price Apparel Autozone Beauty/Cosmetics Chipotle Aldi Super Stores (but often in Jersey Mike's Subs smaller sizes—Target) O'Reilly Automotive Jersey Mike's Fitness/Health Clubs Jimmy John's* Fast Food Dunkin Donuts Circle K* Coffee Starbucks Dollar Tree* Fast Fashion Dollar General Clicks to Bricks 0 100 200 300 400 500 600 700 800 900 2018 Planned New Stores

Source: Cushman & Wakefield Research Race to the Bottom? Dollar stores are growing at an unprecedented rate…

Dollar Dazed Approximate Store Count 99 Cents Only 2013 v. 2017 The top five dollar store chains have added approximately 6,500 new stores over the last Five Below four years.

That equates to a new dollar Dollarama store opening somewhere in the United States nearly every four and a half hours for four Dollar General years straight!

In 2017 alone, roughly 1,700 Dollar Tree (includes Family Dollar) new dollar stores opened in the USA. 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 YE 2013 YE 2017

Source: Cushman & Wakefield Research Source: Cushman & Wakefield Research IT’S ALL ABOUT MILLENNIALS!

MILLENNIAL VALUES: Millennial Generation Born Between 1980  1999 • Experiences Over “Stuff” ARE THE LARGEST CONSUMER GROUP

• Authenticity! Uniqueness! Choice! Variety! 100

• Intimacy in Shopping Experience! 80 60 • Curated Retail - NOT COMMODITY!

40 MILLIONS • Non-Conformist! 20 0 • Cool is a Value! Generation Z Generation X Greatest Generation

59% of Millennials Look for Physical Store Presence When Buying Online. The Millennial Consumer Don’t worry… they usually don’t bite Cool is a Millennial Ethos

Cool IS Experience

Cool is not frivolous.

Woe to the retailer or landlord that underestimates the power of cool.

Tolerant Societies = Creative Societies = Innovative Societies = Cool Cities Economically Dominant Cities

Source: Cushman & Wakefield Research Cool Streets Alternative Urban Retail Green Shoots

Hipster

A person who follows the latest trends and fashions, especially those regarded as being outside the cultural mainstream.

A term often used in a derogatory manner to describe alternative cultural subsets.

Source: Cushman & Wakefield Research A Cool Street Primer How to understand hipsters?

Urban Lumberjacks AKA “Lumbersexuals”

Mostly urban metrosexuals with affinity for plaid. Dons plaids and flannels though often has no actual outdoor experience…

Favorite Food: Pancakes, Poutine

Favorite Drink: Cinnamon Maple Whiskey Sour

Favorite Stores: REI, Urban Outfitters, Army Surplus…

Source: Cushman & Wakefield Research A Cool Street Primer How to understand hipsters?

Hipsterbillies Boom-Sters Mullet Revivalists

Source: Cushman & Wakefield Research A Cool Street Primer How to understand hipsters?

Drag-Sters

Glam-Sters Goth-Sters

Source: Cushman & Wakefield Research A Cool Street Primer How to understand hipsters?

Lib-Sters

Trump-Sters

Source: Cushman & Wakefield Research Clicks to Bricks Brand embassies, returns savings driving more pure play growth in physical space

90 80 70 Wayfair? 60 50 40 30 20 10 0

Store Count (YE 2017) Planned New Stores 2018

Source: Cushman & Wakefield Research Amazon/Whole Foods Has Some Catching Up to Do market share in 2016 was roughly 3% Look for aggressive growth from Amazon/Whole Foods likely to begin 2H 2018.

We anticipate that as many as 500 new stores in different formats may be But will the expansion push be opened in the next five Whole Foods years… Or Amazon Go!

Source: Kantar Worldpanel, Statista, Cushman & Wakefield Research Food Halls ON FIRE! Food Halls: the shared economy for restaurants

Food Halls in the U.S. 450 400 350 300 250 200 Projected Existing 150 100 50 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Cushman & Wakefield Research Craft Brewing Explosion Trend is still not mature nationally STATES WITH 100+ BREWERIES Microbreweries Brewpubs Planned

MASSACHUSETTS 75 29 39 Craft Breweries in the United States MINNESOTA 74 35 42 INDIANA 54 69 25 6,000 WISCONSIN 73 62 27 5,000 MICHIGAN 87 51 33 4,000 VIRGINIA 117 44 63 3,000 OHIO 100 73 47 2,000 ILLINOIS 99 74 44 1,000 NORTH CAROLINA 133 56 55 0 TEXAS 134 58 105 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FLORIDA 141 51 76 Brewpubs Microbreweries Regional Breweries PENNSYLVANIA 84 116 62 OREGON 133 93 26 NEW YORK 170 91 80 WASHINGTON 227 88 52 COLORADO 199 121 67 CALIFORNIA 388 204 156

Source: Brewers Association of America, Cushman & Wakefield Research But Haven’t We Always Had “Cool” Neighborhoods? What’s Different This Time?

“Cool” is a Millennial value, heavily impacting decisions on where to live and shop. As a result, the timeline of the evolution of these neighborhoods has sped up considerably…

• 2000 to 2014 Transformation of Brooklyn’s Williamsburg neighborhood from “challenged” to “edgy cool” to “mainstream cool” • 2010 to 2015 Transformation of Chicago’s Fulton neighborhood from “challenged” to “edgy cool” to “mainstream cool” • 2014 to Present Transformation of Downtown Los Angeles’ Arts District neighborhood from “challenged” to “edgy cool” to… Cool Streets Millennial-driven up-and-coming alternative urban neighborhoods still hot The Evolution of Cool Streets Edgy Cool Bodegas, Bars & Funky Local… Cheap Rents EDGY UP AND COOL COMING Up and Coming Boutiques, More Restaurants Arrive… Rents Climbing Prime Hipness Funky Local Priced Out, Cool National Concepts Arriving… GONE MAINSTREAM Rents Climbing Still Cool, But Going Whole Foods Arrives Mainstream Rents Climbing

STILL Gone Mainstream Creatives Moving On, PRIME COOL, HIPNESS Replaced by More BUT… Affluent Crowd. Pottery Barn!

Source: Cushman & Wakefield Research The Upstarts Challenger brands active on the Cool Streets

EDGY UP AND COOL COMING

PRIME HIPNESS

Source: Cushman & Wakefield Research Cool Street Contenders Privately-held hipster brands can take chances the big chains can’t—and they’re connecting with Millennials!

Source: Cushman & Wakefield Research Can Commodity be Cool? Maybe… but “authenticity” will be a challenge…

Cool Streets, “Survivable Class B Malls” May be the Strategy for Mid-Price Point Apparel Players Priced Out of Class A Malls… EDGY UP AND COOL COMING But Will They Connect With Millennials?

Cheap Rents Won’t Help if They Cannot Connect

PRIME HIPNESS

Source: Cushman & Wakefield Research Entertain Us! Millennials spend more on experience than “stuff” Golf/Sports/Arcade Entertainment Themes Athletics Space BarCades/Mixed (Dave & Aquatic Parks Buster’s, Punch Bowl Social, etc.) Trampoline Rooms TopGolf/Miniature Golf/Glow Golf Indoor Rock Climbing Baseball/Batting Cage Bars Indoor Skydiving Axe Throwing Bars Velodromes (Indoor Cycling Tracks) Ping Pong (Susan Sarandon) Bowling Alleys (Lucky Strike, etc.) Culture/Performing Arts Space Duck Pin Bowling Art Galleries Indoor Go Cart Tracks Museum Space Indoor Shooting Galleries (Real Guns Live Theater Space Optional) Dinner Theaters Event Centers Cirque Space Stand Up Comedy Clubs Experiential Theaters/Dine-In Theaters Live Music Venues IMAX Restaurant/Theaters Float Rooms/Sensory Deprivation Bar/Theaters Rage Rooms Children Themed Theaters Escape Rooms Hipster/Art House Theaters

Source: Cushman & Wakefield Research But What Does it All Mean for Retail Real Estate?

Myths and Realities in the Age of newCommerce

To fully understand, you must first understand the different types of American shopping centers… The Neighborhood/Community Center… Neighborhood/Community and Strip Centers doing fine… Typical Anchors: Grocery Stores Outdoors Drug Stores Mostly Suburban

Neighborhood 30,000 to 125,000 SF Typical Inline Tenants: 3-mile trade area Restaurants Fast Food Community Coffee 125,000 to Juice 400,000 SF Dry Cleaning 6-mile trade area Laundromat Postal Services Dental/Medical Offices Financial Services Retail Boutiques

Source: Costar Group, Cushman & Wakefield Research The Power Center… Neighborhood/Community and Strip Centers: the Most newCommerce Resistant Product Typical Anchors (Big Box): Superstores (w/Groceries) Outdoors Home Improvement/DIY Mostly Suburban Off-Price Apparel Power Consumer Electronics 250,000 to 600,000 SF Arts/Crafts 10-mile trade area Pet Supplies

Typical Inline Tenants: Restaurants Fast Food Coffee Juice Dry Cleaning Laundromat Postal Services Dental/Medical Offices Financial Services Retail Boutiques

Source: Costar Group, Cushman & Wakefield Research The Mall… When Americans think of retail, they think of malls Typical Anchors (Big Box): Department Stores Mostly Enclosed Mostly Suburban

Regional Mall Typical Inline Tenants: 400,000 to 800,000 SF Apparel 15-mile trade area Accessories Shoes Super Regional Mall Jewelry 800,000 SF + Gift Shops/Gadgets 25-mile trade area Books Toys Restaurants Fast Food Coffee Juice Retail Boutiques

Source: Costar Group, Cushman & Wakefield Research ROI Performance Along Class Lines Mall performance gap between best and worst assets… The Retailer Logic Behind this Gap: Class A If the goal is to reduce your physical footprint, while looking to boost your online sales… This inherently means Class C/D that your remaining physical locations are more important than ever before…

CHAINS STRATEGICALLY REDUCING THEIR FOOTPRINTS ARE LARGELY DOING SO IN CLASS B AND C MALLS—NOT CLASS A.

Source: MSCI Global, Cushman & Wakefield Research Not All Malls are in Trouble It’s all about class… Class A and above malls Approximate Number of Malls by Class accounted for more than 200 70% of all mall retail sales in 150 2016. 100 There are roughly 670 Class 50 B and C malls in the US, but 0 they only accounted for 28% A++ A+ A A- B+ B+ B- C+ C C- D of all mall sales last year.

A++ A+ A A- B+ B+ B- C+ C C- D Class D malls accounted for Approximate Share of Total Mall Value by Class less than 0.2% of all mall 25.0 sales last year… 20.0 15.0 10.0 5.0 0.0 A++ A+ A A- B+ B+ B- C+ C C- D

A++ A+ A A- B+ B+ B- C+ C C- D

Source: Cushman & Wakefield Research, Fung Global, Green Street Advisors, Bloomberg Power Centers Rebounded Last Year—Will it Continue? Will traditional power center tenants re-tenant troubled malls? Power Centers saw vacancy 45 9.0% DECLINES in 2017 and into Q1 2018. 40 8.0% 35 7.0% Vacancy had spiked in 2016 30 due to the bankruptcy of 6.0% 25 Sports Authority. 5.0% 20 Roughly 450 stores, averaging 15 4.0% 45,000 square feet in size, Million SF Million closed. 10 Forecast 3.0% 5 One year later, approximately 2.0% 0 340 (roughly 75%) have been backfilled. -5 1.0% -10 0.0% However, Toys R Us 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2019 2020 YTD (F) (F) (F) vacancies will impact these numbers by Q2… Net Apsorption (MSF) New Construction (MSF) Overall Vacancy

Source: Costar Group, Cushman & Wakefield Research Feeling Good in the Neighborhood Neighborhood/Community/Strip vacancy continues to slowly fall Neighborhood/Community 70.0 12.0% Centers

60.0 10.0% Though we anticipate the 50.0 eventual move of Amazon into pharma will prove to be 40.0 8.0% disruptive not just to the drug store industry, but to its real 30.0 6.0% estate, we believe that growth 20.0 in the grocery sector Million SF Million (including growth driven by 10.0 4.0% Amazon/Whole Foods) will likely outpace any occupancy 0.0 losses from the drug store 2.0% (10.0) Forecast sector in the near-term.

(20.0) 0.0% Most of this will play out in 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2019 2020 YTD (F) (F) (F) neighborhood/community/strip centers. Net Apsorption (MSF) New Construction (MSF) Overall Vacancy

Source: Costar Group, Cushman & Wakefield Research Are There Any Good Investment Opportunities? Yes, but you have to know what you are doing! The black cloud hanging over General Risk Levels the retail sector is already impacting investment Malls & Lifestyle Power Centers Neighborhood/ fundamentals. Centers Community Centers Many institutional investors Class A Class A Class A are rebalancing their portfolios to contain less retail and are Class B Class B Class B selling off assets. Class C Class C Class C Many of these assets have challenges, but many don’t!

Low Others are jewels in the Medium rough. High

Source: Cushman & Wakefield Research What’s Happening With the Investment Pool? Focus on Core/Core Plus keeping competitive market for Class A urban & malls Cushman & Wakefield Interest/Activity by Product Type Broker Survey Institutional Public Private Foreign

Urban Malls +30% -70% +40% +30% Overall buyer pool has shrunk Class A by roughly one third. Urban Malls +10% -80% +10% +20% Class B Institutional down 15% to 30% Urban High +40% -80% +70% +70% with active players focusing Street Class A primarily on CORE and CORE Suburban Malls +20% -80% +70% -20% PLUS. Class A Suburban Malls -20% -80% +20% -30% Public/Pension funds wary of Class B retail and playing it safe. Shopping +10% -80% +20% +20% Centers Class A OPPORTUNISTIC PLAYS Shopping -50% -80% -50% -50% Centers Class B Private most active across widest range of retail types The overall buyer pool has shrunk. and classes. Most remaining are looking for “safe bets,” (IE Class A urban or malls). Foreign active, but also largely chasing core. Source: Cushman & Wakefield Research Retail Investment USA Current Cap Rate Asking Ranges

10.0%

9.0%

Up 8.0% Up

7.0% Up Up Class A Up Class B 6.0% Holding Up Class C (so far) 5.0% Holding Holding (so far) 4.0% Holding Holding

3.0%

Malls & Power Centers Neighborhood & Outlet Centers Lifestyle Centers Community Centers

Source: Real Capital Analytics, Costar, Cushman & Wakefield Research Parking Lots Opportunity in excess parking?! Oh yeah…

Source: Cushman & Wakefield Research Challenges & Opportunities Yes, but you have to know what you are doing!

Type Challenges Opportunities Every property must be looked at individually for its Few available and most owners unwilling to This property type still stable and will strengthen as Malls A sell. Though risk is low, likely low cap rate may more Class C malls fail. fundamentals. still not be commensurate with risk. Many will require extensive repositioning and This might be where the most jewels in the rough The financial health of current B re-tenanting. A lot of innovation and are found. Some B malls are in great locations and unconventional thinking will be required. were either poorly tenanted or managed.. tenants, possible re-tenanting scenarios and an C Here is where the most damage will be done. There will be great opportunities for redevelopment Tenanting these will require unconventional or repositioning of properties once properties return understanding of perceived tenants and means. Many will fail. to lenders and can be had for dimes on the dollar or less. risk vs. likely actual risk is Malls, especially Class B, raiding the With investors focusing on core and urban and retail required. Power A traditional power center tenant pool to backfill already making many nervous, there may be some vacancies could have an impact, but it will be cap rates here that are far higher than actual risk. minimal for Class A. Due diligence is a must! If tenant pool diminishes, here is where it will Depending on property, could be some solid value B be felt most. add buys with high yields. The current landscape s Weak already and getting weaker… Might make for good redevelopment plays or value C add acquisitions. increasingly becoming a Drug store disruption may eventually have The most eCommerce resistant and resilient of the buyer’s market. Neighborhood A impact, but these will easily backfill. product types. Class A in secondary markets may provide best yields. Drug store disruption may eventually have Largely a safe bet, look for good value adds to turn B impact, could be a bit of a challenge here. B into A and even greater yield opportunities. Weak already. Not getting weaker, but will Might make for good redevelopment plays or value C take significant investment to improve. add acquisitions.

Source: Cushman & Wakefield Research So Where Does This Leave Us? The story of retail development over the next decade will largely be a tale of mixed-use redevelopment

Challenges Opportunities Solutions Dead/Dying Malls—Mostly Suburban Population Growth to Redevelop Dead Suburban Malls Suburban Increase as Mixed-Use Lifestyle Centers w/Substantial Housing, Office, Medical and/or Hospitality Department Store/Apparel Explosion of Food Retail, Shift Centers Towards Consolidation Entertainment Retail, Experiential Entertainment Focus or Discount Concepts, Off-Price Apparel & Focus Discounter Demand Rising Power Center Vacancies Mixed-Use Works Here Too Mixed-Use Works Here Too

Source: Cushman & Wakefield Research The Amenitization of Retail What’s Really Happening?

• We will no longer need the same number of standalone retail Future of Malls? destinations. • But the number of retail properties “going away” will be far While trophy and Class A fewer than most anticipate. malls will continue to operate as standalone retail • Embrace of mixed-use is the way out for struggling properties. destinations, all mall classes • Demand for retail as “the ultimate amenity” has never been higher, will benefit from embracing particularly in urban environments. Gruen’s initial vision of malls • Amenity retail is focused on strong brands, personal needs retail, being centers of the food, beverage and entertainment. community, as opposed to • The “halo effect” of best in class retail is REAL. merely retail marketplaces. • Strong ground floor retail can allow landlords to charge more for rents above in urban settings. • Strong suburban retail will increasingly have this impact in those settings. • Mixed-use development and redevelopment will be the story of retail real estate for at least the next decade. There is No Room for Mediocrity in Retail Anymore Follow Viktor Gruen’s Original Vision

The Father of the American Mall

• You must give people a reason to come to your store or your “I am often called the father of shopping center in the age of newCommerce. the shopping mall. I would like to take this opportunity to • If your shopping center is the center of your community, it will thrive. disclaim paternity once and for all. I refuse to pay alimony to those bastard developments. • If it isn’t, then build a community around it. They destroyed our cities…”

Viktor Gruen [email protected]

©2018 Cushman & Wakefield.

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