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 Downtown Commons 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 California 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 Retail Market Neighborhood Regional Speciality Strip Overall > The overall average asking rate has risen 1.5 percent in the 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 Southern California 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 Golden 1 Center. 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 # OF TRANSACTIONS 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 Florin Towne Centre (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 Sacramento Kings 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, Walmart 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.