WASHINGTON, DC METRO RETAIL OUTLOOK | Q2 2016 SECOND QUARTER 2016 WASHINGTON, DC METRO RETAIL OUTLOOK DELTA ASSOCIATES 1 WASHINGTON, DC METRO RETAIL OUTLOOK | Q2 2016 WASHINGTON AREA ECONOMY SNAPSHOT INSIDE THIS ISSUE JOB GROWTH UNEMPLOYMENT RATE new jobs during 12 months at May 2016, down from Economy & Outlook....................................................3 60,400 ending May 2016 3.6% 4.5% at May 2015 Retail Market Conditions ...........................................5 AVERAGE HOUSEHOLD INCOME PROJECTED JOB GROWTH Grocery Competition Heats Up ...................................7 AN AVERAGE OF 43,600 Second Quarter Spotlight on Lease Characteristics ...8 per year in 2016-2020 in 2016, 57.7% higher Investment Sales .....................................................10 $121,439 than the US average The Bottom Line ......................................................11 About Delta Associates ............................................12 WASHINGTON AREA RETAIL MARKET SNAPSHOT 10,600 retail jobs were added during the 12 months ending May 2016 on a net basis. Neighborhood and community shopping center effective rents rose by 2.8% in Northern Virginia since 2nd quarter 2015, to $26.16/SF. In Suburban Maryland, effective rents in the same types of centers rose by 1.2%, to $23.32/SF. Vacancy rates for neighborhood and community shopping centers in Northern Virginia and Suburban Maryland are 5.1% and 8.0%, respectively, down 60 basis points since 2nd quarter 2015 in Northern Virginia and down 30 basis points in Suburban Maryland. DELTA ASSOCIATES 2 WASHINGTON, DC METRO RETAIL OUTLOOK | Q2 2016 ECONOMY & OUTLOOK PAYROLL JOB GROWTH The Washington area economy maintained its strong positive momentum in the 2nd quarter of Selected Large Metro Areas | 12 Months Ending May 2016 2016. During the 12 months ending May 2016, the region added 60,400 new jobs. The rate of job growth of the metro area has finally surpassed that of the entire nation, after trailing for years. 200 180 The Professional/Business Services sector continued to be the largest source of new jobs in the 160 Washington metro area in the 2nd quarter, followed by the Leisure/Hospitality, Retail Trade, 140 Government, and Construction/Mining sectors. Only Information – one of the region’s smaller 120 employment sectors – had net job losses over the 12-month period. 100 80 60.4 The unemployment rate in the Washington metro area has continued to decrease so far in JOBS PAYROLL 60 2016 and stood at 3.6% as of May 2016. This is a 90 basis point decline from the metro area’s OF NEW THOUSANDS 40 20 unemployment rate at May 2015. The region’s unemployment rate is the now third lowest 0 among its peer metropolitan areas, trailing only Denver and Dallas-Fort Worth, and is well LA NY DFW SF Bay Atl South Chi Was Phx Phil Den Bos Basin FL below the national average of 4.7%. Source: Bureau of Labor Statistics, Delta Associates; July 2016. The Washington metro area remains well positioned for economic growth in the period ahead. This growth will continue to be driven by the private sector, as Federal employment and RETAIL PAYROLL JOBS procurement have both been stagnant over the past several years. By 2020, we expect that the WASHINGTON METRO AREA Federal government’s contribution to Washington’s Gross Regional Product will decrease to YEAR RETAIL EMPLOYMENT CHANGE approximately 27%, down from the current level of 37%. 2006 269,500 1,800 Retail sector employment growth in the Washington metro area was very strong during the 12 months ending May 2016, with a net gain of 10,600 jobs during the period. This was a 3.8% 2007 271,200 1,700 increase since May 2015, while retail employment grew 2.0% nationally over the same period. 2008 267,500 (3,700) 2009 251,200 (16,300) 2010 255,500 4,300 TOP SECTORS 2011 259,800 4,300 2012 263,000 3,200 for job growth 2013 264,700 1,700 2014 270,200 5,500 Services Mining & Business Business Leisure & Leisure Hospitality 2015 276,500 6,300 Retail Trade Retail Government Construction Professional & Professional 2016 287,100 10,600 *Employment total at March of each year; change reflects the 12 month period ending each March. Source: Bureau of Labor Statistics, Delta Associates; July 2016. DELTA ASSOCIATES 3 WASHINGTON, DC METRO RETAIL OUTLOOK | Q2 2016 AVERAGE Average household income in the Washington metro PAYROLL JOB GROWTH area grew by 51% from 2000 to 2016, compared to just Washington Metro Area HOUSEHOLD 36% nationally, and it currently exceeds the national INCOME average by 58%. By 2021, the Washington metro area’s 140 average household income is projected to rise another 8%, 120 5-Year Projected Average = 43,600/Year compared to an increase of 9% nationally. The elevated 100 20-Year Annual Average = 41,700/Year household incomes in the Washington area yield greater 80 60 discretionary spending and support demand for retail 40 2000 goods and space. Washington Metro Area (Actual) 20 0 $80,600 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 The Washington metro economy remains well-positioned AVERAGE) (ANNUAL -20 for growth in the period ahead. For years the region’s -40 -60 U.S. economic recovery was held back by sequestration, JOBS THOUSANDS OF NEW PAYROLL $56,600 shutdowns, and other harmful effects of federal budget Source: Bureau of Labor Statistics, George Mason University Center for Regional Analysis, Delta Associates; instability. During this period, the region lost significant July 2016. ground to its peer metro areas. Now that the Federal government has put budget-related turbulence to rest – at 2016 least for the time being – economic growth in the region CONSUMER SENTIMENT Washington Metro Area (Actual) United States - Quarterly $121,439 has gained real traction. Job growth, in particular has been strong, especially in high-paying sectors. We predict 120 that 59,800 new jobs will be created in the region in 2016, 110 U.S. with the pace of annual job growth slowly declining in 20-Year Average = 87.1 $77,008 subsequent years. Overall, we expect annual job growth in 100 the metro area to be 43,600 over the next five years. 90 INDEX 80 The Bloomberg/University of Michigan index of consumer 70 sentiment in the U.S. registered at 93.5 in June 2016. While 2021 this reading is down from 96.1 in June 2015, it is the second 60 Washington Metro Area (Projected) highest level (after May 2016) in the previous 12 months 50 $131,168 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 and is well above the long-term average. International instability as well as the upcoming presidential election Source: University of Michigan, Delta Associates; July 2016. U.S. creating uncertainty and pessimistic rhetoric across the $84,021 ideological spectrum have likely dampened consumer confidence despite continued domestic job growth and cheap fuel prices. Source: ESRI, Delta Associates; July 2016. DELTA ASSOCIATES 4 WASHINGTON, DC METRO RETAIL OUTLOOK | Q2 2016 RETAIL MARKET CONDITIONS The inventory of existing neighborhood and community shopping centers totals 73.9 million SF in the Washington metro area’s suburbs as of 2nd quarter 2016. Northern Virginia has 40.3 million SF of space in these centers, and Suburban Maryland has 33.6 million SF. Northern Virginia leads the way at 13.9 SF per capita in its neighborhood and community centers, while NEIGHBORHOOD/COMMUNITY CENTER SPACE PER CAPITA RETAIL PIPELINE Suburban Maryland has 13.7 SF per capita. For the Washington Washington Metro Area Suburbs | 2nd Quarter 2016 Washington Metro Area Suburbs | All Shopping Center Types | 2nd Quarter 2016 metro area as a whole, the average is 13.8 SF per capita of 14.5 8 neighborhood/community shopping center space. Northern Virginia Suburban Maryland Metro Average: 13.8 7 6 There is more than 780,000 SF of shopping center space under 14.0 13.9 construction across all shopping center types in Suburban 13.7 5 Maryland and more than 460,000 SF under construction in 13.5 4 Northern Virginia. Maryland also has 2.1 million SF of planned 3 2 shopping center space – defined as space in centers where SF/CAPITA CENTER 13.0 1 plans are drafted, permits and financing have been applied FEET OF SQUARE MILLIONS NEIGHBORHOOD/COMMUNITY NEIGHBORHOOD/COMMUNITY 0 12.5 for, and ground breaking is all that remains to take place. This Under Construction Planned Proposed Northern Virginia Suburban Maryland trails Northern Virginia, which has 2.8 million SF of planned space. Suburban Maryland and Northern Virginia have 6.7 and Source: REIS, Delta Associates; July 2016. Source: REIS, Delta Associates; July 2016. 5.0 million SF, respectively, of proposed space for which no permits or financing have been applied. VACANCY RATES NEIGHBORHOOD/COMMUNITY CENTER VACANCY Select Metro Areas | 2nd Quarter 2016 Vacancy rates for Northern Virginia and Suburban Maryland Washington Metro Area Suburbs | Neighborhood/Community Centers at 2nd quarter 2016 are 5.1% and 8.0%, respectively, down 10% 60 basis points in Northern Virginia and down 30 basis points Northern Virginia Suburban Maryland 16% in Suburban Maryland since the 2nd quarter of 2015. While 9% 14% National Rate = 10.0% 8% vacancy rates in neighborhood and community centers remain 11.8% 11.8% 12% 11.4% 10.7% 11.0% elevated relative to their pre-recession averages across the 7% 10.2% 10% 6% metro area, they have been declining slowly since 2012. 8.0% 8% 5% 6.4% 6.5% 4% 6% 5.1% Despite the slow pace of vacancy improvement, the Washington Rate Vacancy Overall 3% metro area is one of the strongest performers nationally, as 4% 3.2% 2% both Northern Virginia and Suburban Maryland are well below 2% SHOPPING CENTER VACANCY RATE SHOPPING VACANCY CENTER 1% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* 0% the national average of 10.0% vacancy, with Northern Virginia, SF N.