Colliers 2013 North American Retail Outlook

7/29/2019 Colliers 2013 North American Retail Outlook

1/11


2/11p. | COllIERs INTERNATIONAl

HIGHLIGHTS | 2013 OutlOOk | retail | nOrth america

Further reecting a lackluster quarter, several o our indicators t

came in lat or positive were less than stellar. The Chicago Fe

National Activity Index (CFNAI) was essentially unchanged, with a

reading at the end o Q, dropping below zero (indicating below-av

age growth) in October beore rebounding to . in Decemb

Personal incomes shot up .% in December, but only becau

corporations responded to the threat o higher capital gains rates

shiting dividend payments to . We dont expect that grow

rate to be sustained, at least in the short term: The reversion o soc

security taxes to .%, up rom the rom the .% collected during

past two years, removes an estimated billion rom consume

pocketsequivalent to the combined U.S. revenues o McDonald

Amazon.com, and Costco. Although the handul o retailers that rep

monthly sales turned in better-than-expected January results, re

sales reported by the Commerce Department rose by only .%

household spending adjusted to lower take-home pay.

There was encouraging data, too. U.S. auto sales ended the ye

at . million vehicles, up % rom , and the highest volum

since . Chinas Q GDP growth came in slightly ahead o analysexpectations; rising household incomes there are expected

contribute to domestic consumption/retail sales this year. Conditions

Europe have eased somewhat in the past six months as Northe

countries stepped up support or the European Monetary Unio

resulting in sharply lower yields on -year Spanish and Italian bon

Here in the U.S., with two more revisions to GDP, the advance

number will likely be revised upward to be weakly positive, but w

expect growth or H to come in at or below a % annualized ra

THE u.s. HOusINg RECOVERy: ITs REAl THIs TIMERetail real estate has tracked in lockstep with the housing mark

irst, with its collapse and since then along its painu

uneven recovery. During the past year, we have observed consistenimproving trends in the housing market and now are condent that t

sector is growing again. In its year-end housing wrap-up, Wells Fa

noted that unlike other economic indicators (namely consum

condence), residential transaction volume, housing prices, and per

activity were not shaken by broader unease over the countrys s

debate last all.

Beginning in September , when the National Association o Ho

Builders and First American launched their Improving Markets Ind

(IMI), Colliers has looked to the IMI to quantiy the strengthening U

residential market. We like the IMI because it aggregates metropolit

area data on employment growth, home price appreciation, and sing

amily permitting activity, and only lists a market as improving i all th

trends have been positive or six months. The IMIs list o improv

metro areas has grown out o months (see chart on ollow

page), jumping rom at the end o Q to in Q .

February , the IMI hit a record level: metro areas, and or t

rst time, every state in the country has at least one market represent

This broad-based housing recovery bolsters our more positive outlo

or retail sector perormance. In mid- we pointed

strengthening year-over-year home goods sales compsrepor

irst by specialty retailers Williams-Sonoma, Bed Bath & Beyo

ECONOMIC RECAP

During the ourth quarter o , U.S. national attention turned

sharply to the so-called scal cli and the potentially devastating

impact its simultaneous budget cuts and tax changes could have on

the countrys uneven economic recovery. Although Congress agreedto a basic deal at the absolute last minute (read: New Years Eve),

public worry over what-i scenariosmost o them badintensied

through the all and peaked in mid-December, just as the holiday

season was in ull swing. As a result, despite continued improvement

in the housing and employment markets, only our o Colliers twelve

Bellwether Economic Indicators trended higher or the quarter.

Sources: Trepp, National Restaurant Association, Fitch, Commerce Department, Citibank,National Federation o Independent Businesses, Autodata*Colliers projection; data not yet available

Chicago Fed National Activity Index (CFNAI)

GDP U.S.

GDP Hong Kong*

GDP Germany

NFIB Small Business Optimism Index

NRA Restaurant Performance Index

Citibank Economic Surprise Index (U.S.)

CMBS retail delinquencies (% of total)

National Unemployment Rate

Retail sales growth (Commerce Dep't)

Personal Income (% growth)

Auto sales (annualized pace in millions)

TREND VERSUS

PRIOR QUARTER

BEllwETHER ECONOMIC INdICATORs

Surprisingly solid U.S. retail sales and business investment could not

oset sharply lower ederal deense spending, which led to the Gross

Domestic Product (GDP)s irst quarterly contraction (an -.%

advance reading) since Q . Germany bucked the Eurozone

recession or most o the year, but its advance Q reading came in at

-.% as domestic rms deerred or cancelled planned investments in

response to a slowing global economy. The Restaurant Perormance

Index dropped below its threshold level or expansionary

activityin October and remained there or the rest o the quarter. The

Citibank Economic Surprise Index (CESI) tracked a volatile path in

beore turning negative late last month, indicating that more

economic reports are coming in below consensus estimates.


3/11

HIGHLIGHTS | 2013 OutlOOk | REtAIl | nORth AmERIc

COllIERs INTERNATIONAl | p

Other Top rental markets included San Francisco (./PS

San Jose/South Bay (.), Miami-Dade County (.), aLong Island (.). The burgeoning technology industry

positively impacting real estate undamentals throughout the entBay Area. As companies expand hiring, employees will dema

more apartments and more amenities, in some instances creatinewly viable commercial corridors that will add desperately needretail inventory. For the country, we are projecting a slight eros

in rental rates or Q due to post-holiday shake-out and stoclosings announcements, which will pressure landlords to ren

marginal tenants in place rather than ace store closures.

In , nearly million square eet o shopping center space ca

online nationwide, with a dozen markets contributing nearly one-ho this total. O those twelve, only ourWashington, D.C., Oaklan

East Bay, and New Yorks Westchester County and Long Islandcobe considered Core, as the strongest perormers includMinneapolis-St. Paul (nearly , SF), Dallas (+, S

Orlando (+, SF), and Denver (+, SF). We expect tpattern o delivery to continue in as secondary markets bene

rom ) continuing improvement in housing trends, as evidencedtheir concentration in the IMI data cited earlier; ) employment growin manuacturing centers such as Ohio, Michigan, and Pennsylvan

) the expansion o the Energy sector, not just its impact in powhouse markets such as Houston (see photo above) but the potential

available spaces in metropolitan Honolulu. Increasing internatio

tourist countspassenger traic hit a new record high or t

rst three quarters o especially rom Asia, are driving dema

or goods and services in Waikiki. A number o high-proile re

developments are progressing, including General Growth Properti

expansion plans or the Sears pad at Ala Moana Center, Taubm

Centers International Market Place in Waikiki, and Hughes mixed-u

master-planned development in Kakaako.

Pier , and more recently by home improvement giant Home Depot

as anecdotal evidence that households were prioritizing spending

on their primary residences. That observation has now been picked

up by a broader section o sector analysts and Wall Street. Estimates

vary on how much the average new home sale or multiamily move-in

generates in retail sales, but our research colleagues on the residential

side suggest a one-month rent or mortgage payment as a reliable

proxy. To capitalize on move-in spending potential, opportunistic

retailers would be well advised to prioritize merchandising and

inventory adjustments: Our department store sources have noticed

more rapid sell-throughs o small appliances and home dcor items

taking place in at stores in hot multiamily submarkets. We project

that housingboth retail spending and the impact o higher employmentin construction-related positionswill contribute around basis

points to GDP growth. The strength o the U.S. market also

presents an attractive opportunity or oreign housewares and

urniture brands; we wouldnt be surprised to see some new retailers

rom Europe or Asia look at U.S. expansion in the coming year.

CURRENT CONDITIONS

What ollows is an overview o shopping center operating results

or Colliers U.S. retail markets, along with a short discussion o a ew

key trends weve been tracking this quarter that are impacting our

national outlook.

The average nationwide rental rate ended the year at ./PSF,

essentially at compared with Q and down . (-.%) rom Q

. Retail sector momentum continues to accelerate in the Hawaii

market, which again led the country with an asking rental rate o

./PSF, up % year-over-year. Corresponding vacancy rates

dropped a stunning basis points, rom .% to .%, reecting

heated competition among retailers to secure one o the limited quality

0

50

100

150

200

250

300

125

Sep

2011

1223

3041

76

98 99 101 100

80 84 80

99 100

125

201201

242

259

Nov

2011

Jan

2012

Mar

2012

May

2012

Jul

2012

Sep

2012

Nov

2012

Jan

2013

# of Improved Markets

NAHB/FIRsT AMERICAN IMpROVINg MARkETs INdEx

Source: National Association o Home Builders

Continued on pag




uNITEd sTATEs | sHOppINg CENTER MARkET sTATIsTICs

MARkETINVENTORy*

dEC , (sF)NEw supplyyTd (sF)

uNdERCONsTRuCTION

(sF)

VACANCy RATEdEC , (%)

VACANCy RATEdEC , (%)

yTdABsORpTION

(sF)

QuOTEd RENTdECEMBER , (us$psF)

y-O-y CHANIN RENT (%

Atlanta, GA 142,642,479 301,224 71,178 14.9 14.5 1,004,274 12.72 (2.60)

Bakerseld, CA 9,216,143 30,937 30,934 9.4 9.1 72,233 14.00 (6.85)

Baltimore, MD 45,713,525 270,616 51,363 8.2 7.8 514,444 18.74 1.02

Birmingham, AL 27,124,520 14,641 - 13.7 13.3 175,272 8.59 (7.03)Boise, ID 12,974,068 8,260 18,098 11.7 11.2 29,784 12.00 2.65

Boston, MA 87,564,315 296,267 - 7.0 6.5 549,034 15.50 2.51Charleston, SC** 15,241,053 - - 9.2 7.3 - 15.46 (1.02)

Charlotte, NC 52,055,791 292,300 5,177 11.6 12.0 (75,789) 13.23 0.92

Chicago, IL 160,237,068 83,795 507,000 12.3 12.2 (96,599) 15.18 (3.19)

Cincinnati, OH 35,677,375 16,865 - 12.8 13.0 550,102 10.59 (8.31)

Cleveland, OH 60,308,591 80,028 15,700 13.6 13.0 (23,543) 10.37 (2.17)

Columbia, SC 15,034,748 - - 9.1 9.3 51,121 10.50 (2.87)

Columbus, OH 32,265,903 63,713 124,437 12.2 11.1 317,941 11.73 (6.68)

Dallas/Ft. Worth, TX 150,748,809 470,171 135,093 14.2 12.8 2,193,546 13.32 1.83

Denver, CO 72,675,061 414,564 25,416 9.6 9.4 934,929 13.86 0.14

Detroit, MI 72,425,516 107,287 20,400 15.6 15.4 439,827 12.39 (0.56)

Fresno, CA** 24,786,257 53,732 550,000 12.5 12.8 104,842 13.47 (0.88)

Ft. Lauderdale-Broward, FL 48,509,366 161,708 - 9.9 9.0 478,726 17.52 0.69

Green Bay, WI 6,663,720 9,200 - 14.1 13.4 121,319 9.63 (3.70)

Greenville/Spartanburg, SC 29,480,691 10,500 63,800 9.4 10.4 (54,870) 8.93 0.00

Hartord, CT 42,749,225 159,792 35,200 8.4 8.5 389,672 13.21 (0.83)Hawaii** 22,322,081 148,799 338,515 6.0 4.0 301,649 4043 16.4

Houston, TX 140,973,923 62,305 n/a (39,354) 13.7 14.03 2.18 (0.57)

Indianapolis, IN 40,132,558 29,373 - 11.9 11.4 261,316 11.61 (2.19)

Jacksonville, FL 38,930,678 179,657 - 12.1 11.8 203,795 12.70 (5.01)

Kansas City, MO-KS 39,252,023 57,218 - 14.2 13.3 421,636 11.95 (0.91)

Las Vegas, NV ** 44,201,964 195,000 - 12.1 10.7 825,682 16.32 (1.45)

Little Rock, AR 15,150,399 - - 8.8 7.9 26,415 10.59 9.97

Long Island, NY 53,283,765 314,562 42,300 5.0 5.2 192,661 23.35 (2.30)

Los Angeles - Inland Empire, CA 86,905,414 216,979 83,334 11.5 11.9 117,503 16.94 (7.48)

Los Angeles, CA 153,552,916 184,752 139,139 6.8 7.3 (479,475) 22.41 (0.49)

Louisville, KY 28,334,804 70,778 26,607 11.7 10.4 57,603 10.97 (5.67)

Memphis, TN 30,725,425 175,825 14,080 13.0 14.4 259,481 10.84 (0.82)

Miami-Dade County, FL 46,696,510 167,581 48,505 5.5 4.8 476,517 23.55 6.51

Milwaukee, WI 34,307,099 413,803 5,300 11.9 11.6 574,712 11.42 0.26

Minneapolis, MN ** 43,032,294 679,960 475,916 7.7 7.5 639,543 15.48 (5.84)

Nashville, TN 29,814,913 60,200 - 9.7 12.0 (363,765) 12.95 (2.41)

New Jersey - Northern 92,198,983 63,200 42,800 10.0 9.9 41,862 19.53 0.41

Oakland/East Bay, CA 40,769,545 413,797 132,002 6.1 6.2 402,499 21.04 0.14

Oklahoma City, OK 27,158,626 6,580 4,000 10.4 9.5 197,605 9.75 (0.71)

Omaha, NE** 26,814,996 55,520 18,554 11.6 11.0 463,727 11.91 2.06

Orange County, CA 62,659,926 79,771 - 6.9 7.2 (92,527) 22.70 0.09

Orlando, FL 63,333,415 416,855 - 11.5 11.9 250,641 13.86 (7.17)

Palm Beach County, FL 35,269,323 8,092 163,252 10.2 9.5 314,166 16.42 (4.48)

Philadelphia, PA 152,177,247 341,178 101,087 9.7 10.0 58,874 14.33 (1.10)

Phoenix, AZ 104,240,834 212,894 92,132 16.4 15.5 1,880,491 13.66 (2.43)

Pittsburgh, PA 32,233,140 225,851 39,400 6.6 5.7 463,288 11.45 (4.02)

Portland, OR 35,292,265 22,250 - 8.2 9.4 (288,077) 16.28 (5.24)

Raleigh/Durham/Chapel Hill, NC 38,477,861 69,323 53,424 9.1 9.0 151,025 14.67 (6.68)

Reno, NV 13,993,317 - - 13.3 14.6 (47,829) 14.89 (3.12)

Richmond, VA 29,725,934 148,442 20,400 11.0 11.6 (91,220) 13.12 (4.65)

Sacramento, CA 50,888,619 25,500 3,800 13.7 13.5 387,637 16.25 (4.19)San Diego, CA 53,768,846 222,355 190,383 7.6 7.4 501,993 20.28 (1.79)

San Francisco, CA 9,439,743 - - 4.0 3.8 6,227 26.27 (4.12)

San Jose/South Bay, CA 30,557,493 145,522 - 6.3 6.5 121,572 26.15 1.87

Savannah, GA 7,455,973 - - 8.8 9.2 (95,728) 14.48 (0.28)

Seattle/Puget Sound, WA 57,974,052 359,259 235,000 10.3 9.1 1,047,510 17.80 (1.87)

St. Louis, MO 55,502,603 114,417 57,500 11.0 11.1 287,666 12.02 (4.98)

Stockton, CA 19,445,085 - 158,000 10.9 9.9 238,299 15.15 (2.82)

Tampa/St Petersburg, FL 87,575,353 127,200 24,232 10.8 10.6 270,517 13.07 (1.58)

Washington, DC 81,568,273 465,749 387,305 7.5 6.9 708,954 22.25 0.09

West Michigan** 32,212,073 28,500 - 17.4 17.4 30,171 9.32 0.43Westchester County, NY 50,646,091 382,794 515,299 6.9 6.8 387,829 19.34 3.04

TOTAls 3,283,090,606 9,737,441 5,066,062 10.4 10.1 18,776,502 15.28 (0.01)

* Community and Neighborhood Centers | ** Select Colliers ofces track their own retail market data. | Sources: CoStar, Colliers Research


5/11



Our periodic monitoring o retailers mobile interaces and dedicatedapps over the past year revealed more user-riendly platorms.

Although we dont have complete detail on how companies invested

their development spend, its obvious that executives prioritized mobile

initiatives which, or some irms, meant addressing internal

conidence issues regarding actual or perceived lack o mobile

technology knowledge that may have paralyzed previous decision-

making. As a result o this collective investment, mobile remains

extremely well positioned to grow both in absolute volume and as a

percentage o total retail sales. By , eMarketer predicts that

mobile revenues could come close to quadrupling rom their

volumes (see chart above).Continued on pag

new boomtowns to emerge near shale and natural gas reserves

and ) the opening o the expanded Panama Canal, which willreorganize the existing hierarchy o U.S. port cities. Well discusssecondary markets again later in this report when we reveal our

Trends to Watch.

MOBIlE dEVICEs gRAB HIgHER ONlINE MARkET sHAREMobile devices impact on retail sales, which barely registered two

years ago, spiked dramatically in . O the + billion in online

sales reported by comScore, between % and % (depending on

the source) were transacted over a mobile device. Several actors

are converging to aid the rapid ascent o mobile as a tool or both

product research and retail transaction activity. First, increasing

penetration o mobile devices has created a signiicantly larger

market o would-be shoppers: Wireless Intelligence, the GSM

Associations research arm, estimates there are million mobile

devices currently in use by a U.S. subscriber base o million.

Second, the surge in applications sotware development has trans-

ormed usage patterns: Citi Research recently reported that % o

mobile technology activity is non-communications usage. Traditionalsmartphones small screens hinder users ability to navigate complex

websites and view products easily. Enter the phablet: a smart-

phone with a larger screen that blends phone and tablet (and

its a word that makes us smile every time we say it).

0 5

20

40

60

80

100

10

15

20

25

Total Volume ($ Billions) % of Total E-commerce Sales

2011 2012 2013* 2014* 2015* 2016*

gROwINg MOBIlE E-COMMERCE REVENuEs

Source: eMarketer | *projected

sElECTEd RETAIlERs OpENINg + u.s. lOCATIONs IN

RETAIlER CATEgORy EsT. OpENINgs

Aaron' Home -

Avance Ato part Ato -

Atozone Ato

Be Bath & Beon (a concet) Home

Bet B Mobie Home

Bi lot diconter

Bao wi win Retarant

Carter' seciat

Car' seciat -

Chiote Fat Foo -

CVs dr -

dic' sortin goo Hobb

doar genera doar

dnin' dont Fat Foo - (net)

Fami doar doar

Five Beo seciat

Foot locer/la Foot locer seciat

Franceca' seciat

Hibbett sort Hobb -

Homegoo Home (net)

Jo. A. Ban seciat -

Mcdona' Fat Foo

Mattre Firm Hoin Home

Michae Hobb -

O'Rei Atomotive Ato (net)

Qoba Fat Foo -

panera Fat Foo -

pe Bo Ato

pia Ht Fat Foo (net)

Ro store (a) diconter

sa Beat Hoin seciat -

starbc Fat Foo *

sherin-wiiam seciat -

Tractor s Mic. -

uta seciat

urban Otftter (a bran) seciat

Vitamin shoe seciat

wamart (a) diconter -

wareen dr -

*Extrapolating rom stated corporate objective to open 1,500 new locations in next fve year

Source: PNC Research, Colliers Research, company reports




uNITEd sTATEs | RETAIlER REpORT CARd

RETAIlER

MOsT RECENT

REpORTINgpERIOd

% CHg IN y-O-y

sAlEs (MOsT

RECENT QTR)

% CHg IN

y-O-y sAlEs

(pREVIOus QTR) COMMENTs OuTlO

dEpARTMENT sTOREs

Belk Q3 2012 5.8 4.9 converting 15 more stores to agships through remodels and enhanced premium brands

Dillard's Q3 2012 5.0 3.0 strength in men's apparel, men's and women's accessories; managing expenses well

JCPenney Q3 2012 (26.1) (21.7) store trafc ell 12%; corporate promotions strategy still conusing customers

Macy's Q3 2012 3.7 3.3 stronger-than-expected quarter with strength in men's, home, and select women's apparel

Nordstrom Q3 2012 10.7 4.5 ull-line stores +11.2%, Rack +8.1%; will launch six pop-up shops in February

Neiman Marcus Q1 2013 5.4 7.9 company now sells online in 100 countries; ne jewelry outperorming

Saks Fith Avenue Q3 2012 3.3 4.7 signicant investment in Project Evolution, their omnichannel systems platorm

Sears (U.S.) Q3 2012 (1.6) (2.9) new pricing and promotions strategies helping sales o appliances, apparel

The Bon Ton Q3 2012 1.9 0.1 narrower net loss; managing clearance goods more closely; announced two new stores

AuTO

Advance Auto Parts Q4 2012 (1.9) (1.8) BWP acquisition closed December 31, improves competitive positioning in the NortheastAutoZone (U.S.) Q1 2013 0.2 2.1 higher new car sales beginning to weigh on results, especial ly or merchandise

O'Reilly Auto Parts Q4 2012 4.2 1.3 proessional business growing aster than Do-It-Yoursel; comps grew on higher avg. ticket

Pep Boys Q3 2012 (2.7) at dropped CapEx by $5 million by pushing planned new store openings into 2013

dIsCOuNTERs

Big Lots (U.S.) Q3 2012 (4.6) (1.9) extensive 2013 ocus on remerchandising; insider trading probe o ex-CEO continues

Costco (U.S., with/excl. uel) Q1 2013 7.0 / 6.0 6.0 / 6.0 planning 5% square ootage growth globally in 2013;

Dollar General Q3 2012 4.0 5.1 heightened competition; plans increased investments in price to drive sales volume

Dollar Tree Q3 2012 1.6 4.5 higher trafc driving sales; continuing to add coolers/reezer cases to stores

DSW Q3 2012 6.3 4.2 trafc, conversion, units per transaction all up in Q3; increased FY 2012 earnings guidance

Family Dol lar Q1 2013 6.6 5.4 consumables as a percentage o total sales increased nearly 400 basis points, to 73.9%

Fred's Super Dollar Q3 2012 (2.5) (1.0) trafc, sales trended up in last month o quarter; gaining traction with Pharmacy

Kohl's Q3 2012 1.1 (2.7) Citi downgrade ollowing a challenging holiday season

Ross Q3 2012 6.0 7.0 or the quarter, juniors perormed best; southwest Texas and Florida led regionally

Sam's Club (U.S., excl. uel) Q3 2013 2.7 4.5 continued investment in pricing; testing programs to accelerate membership income

Target Q3 2012 2.9 3.1 opened two more City Targets; strong results rom Credit Card divisionTJ Maxx Q3 2013 7.0 7.0 $200M Sierra Trading post acquisition provides them an established ecommerce position

Tuesday Morning Q2 2013 5.6 1.7 stronger-than-expected customer response to Nov./Dec. sales events

Walmart (U.S.) Q3 2013 1.5 2.2 positive sales comps across all regions o the country and merchandise categories

gROCERy

The Fresh Market Q3 2012 5.6 8.0 expanded into Caliornia: rst store opened in Oct.; expecting West Coast to drive growth

Harris Teeter Q1 2013 2.5 3.0 cautious outlook or FY 2013 but continued expansion in Washington DC metro area

Kroger (excl. uel) Q3 2012 3.2 3.6 record Q3 EPS; wil l bui ld, expand, or relocate 50 stores during calendar year 2013

Roundy's Q3 2012 (3.6) (3.3) reduced quarterly dividend; Chicago-area stores holding up well against competition

Saeway (total / excl. uel) Q3 2012 0.2 / 0.1 1.9 / 0.8 sales at, but management team predicting market share gains during the next year

Supervalu (Retail ood) Q3 2013 (4.5) (4.3) sale o ve brands removes several weak perormers rom corporate balance sheet

Weis Markets Q3 2012 (1.7) 0.4 hit unavorable YoY comp with higher Northeast storm-driven sales in September 2011

Whole Foods Q1 2013 7.2 8.5 opening 11 new stores in FY 2013, including rebranding o six Johnnies Foodmasters

HOBBy

Barnes & Noble (retail) Q2 2013 (2.9) 4.6 gaining traction with third-party Nook distribution, but warned o uture store closings

Best Buy (U.S.) Q3 2013 (4.3) (3.2) at holiday comps; customers appear to be delaying purchases ahead o product launches

Cabela's Q4 2012 12.0 3.9 record Q4 earnings; comp sales growth driven by sales o guns and ammunition

Dick's Sporting Goods Q3 2012 5.1 2.9 expanded testing o ship-rom-store program; launched mobile app in Q3

GameStop (global) Q3 2012 (8.3) (9.3) strong launches o Madden 13, Borderlands 2 couldn't oset declines in hardware business

hhgregg Q3 2013 (9.7) (8.8) shiting product mix away rom video, electronics to appliances, urniture, tness equip.

Ofce Depot (N. America) Q3 2012 (4.0) (6.0) within next ve years, chain will downsize or relocate 500 stores to mid-size ormats

OfceMax (retail) Q3 2012 (2.6) (1.8) merchandise mix changes benetting margins; Ofce Depot merger speculation

PetSmart Q3 2012 6.5 7.0 signicantly raised FY earnings guidance ater another strong quarter

Staples (N. America) Q3 2012 (1.0) (2.0) investing in new product lines; will triple online assortment to nearly 100,000 SKUs


7/11



uNITEd sTATEs | RETAIlER REpORT CARd (CONTINuEd)

RETAIlER

MOsT RECENT

REpORTINgpERIOd

% CHg IN y-O-y

sAlEs (MOsT

RECENT QTR)

% CHg IN

(y-O-y sAlEs

pREVIOus QTR) COMMENTs OuTlO

Aaron's (corporate-owned) Q4 2012 4.6 6.5 Black Friday promotion, immediate delivery with no payment until Jan., drove record resultsBed Bath & Beyond Q3 2012 1.7 3.5 executives continuing to hint at longer-term international expansion plans

Home Depot (U.S.) Q3 2012 4.3 2.6 acquisition o U.S. Home Systems (kitchen/bath reacing) wil l improve ulllment

Lowe's (U.S.) Q3 2012 1.8 (0.2) more eective promotions management drove outperormance in cabinets/appliances

Pier 1 Q3 2013 7.9 6.1 35% o online orders picked up in-store; hal o calendar '13 CapEx going to e-commerce

Williams-Sonoma, Inc. Q3 2012 8.5 7.4 hol iday sales up 4.8% year-over-year; planned expansion into Australia in early 2013

pHARMACy

CVS Q4 2012 4.0 4.3 raised 2013 guidance; MInuteClinic revenue up 38% or the quarter; +226 bps market share

Rite Aid Q3 2012 (1.5) at company celebrates its 50th anniversary in 2013; CapEx to increase 20% on add'l remodels

Walgreens Q1 2013 (8.0) (8.7) growth platorm ocused on wellness, global expansion, and emphasis on community health

spECIAlTy AppAREl

American Apparel (incl./excl. online) Q3 2012 20.0 / 21.0 16.0 / 14.0 overall and online sales up; inventory efciency improving

Ann Taylor Q3 2012 4.0 4.7 opened rst Canadian store; has begun to ull online orders in stores

The Buckle Q3 2012 2.4 (0.8) men's merchandise, private label goods trending higher as a percentage o sell-throughs

Destination Maternity Q1 2013 1.9 2.7 Q1 revenue lower; opened its rst 12 leased departments in BuyBuy Baby

The Gap (all) Q3 2012 6.0 6.0 Gap N.America (+7.0%), Banana Republic (+6.0%), Old Navy (+9.0%), international (-3.0%)

H&M Q4 2012 at at online investments, new brand launch weighed on Q4 prots

Hot Topic Q3 2012 0.1 3.9 CFO resigned; Torrid rebranding drove signicant (+190 bps) improvement in gross margin

Limited Brands (al l) Q3 2012 5.0 8.0 Victoria's Secret earned record operating prot in Q3; La Senza business stabil izing

Men's Wearhouse Q3 2012 9.5 4.4 comps moved higher on promotional activity, which drove higher units sold

Zumiez Q3 2012 3.7 9.5 cut Q3 earnings guidance based on weak sales in Europe

REsTAuRANTs

Applebee's Q3 2012 2.0 0.7 chain is ully ranchised; Q3 results reected higher average check, lower trafc

BJ's Restaurants Q3 2012 2.3 4.4 comps gain on new loyalty program, bartender education to drive crat beer sales

Bloomin' Brands Q3 2012 3.6 2.4 all our core chains comped higher; raised FY guidance or revenues and earnings

Bob Evans Q2 2013 1.0 1.0 corporate ocus on restaurant updates; post-"reresh" locations lit sales 5%, ROI 20%

Brinker Int'l (system-wide) Q2 2013 0.9 2.7 Chili's gained market share during holidays; Maggiano's achieved 12th qtr o comp growth

Bualo Wild Wings (owned) Q4 2012 5.8 6.2 high chicken wing costs continued in Q4; multi-year partnership with NCAA or March Madness

Burger King (U.S./Canada) Q4 2012 3.7 1.6 U.S./Canada led global growth in Q4; 55th Anniversary Whopper(R) promtion drove trafc

Cheesecake Factory (total) Q3 2012 2.5 1.7 Cheesecake (+2.9%) with increases across the U.S. and across dayparts

Chipotle Q4 2012 3.8 4.8 7.1% comp sales growth or 2012; 165-180 new restaurants planned or 2013

Darden (Basic/Specialty) Q2 2013 (2.7) / 0.7 (0.3) / 2.2 all three chains comped lower: Olive Garden (-3.2), Red Lobster (-2.7%), Longhorn (-0.7%)

Denny's (system-wide) Q3 2012 0.4 0.8 guest trafc down, but customers willing to trade up to higher-priced limited oerings

Domino's Q3 2012 3.3 1.7 new store redesign will accommodate higher percentage o carryout purchases

Dunkin' Donuts (U.S.) Q4 2012 3.2 2.8 strategic development and investment aimed at increasing ranchisee protabili ty

Einstein Noah Q3 2012 0.2 1.3 company opted to recapitalize itsel ollowing a strategic review process last all

Jack in the Box (system-wide) Q4 2012 3.1 2.8 quarter sales growth nearly 2x the QSR sandwich segment average; gaining market shareKona Grill, Inc. Q3 2012 0.2 2.3 operating margins remain near the top o their peer group

Krispy Kreme (company stores) Q3 2013 6.8 5.4 increased FY 2013 outlook; predicted double-digit earnings growth or FY 2014

McDonald's (U.S.) Q4 2012 0.3 1.2 reocusing marketing message on value oerings, new products (Fish McBites)

Mimi's Ca Q2 2013 (5.6) (3.3) $50 million sale to French operator o multiple ca brands should drive ops efciencies

Panera Bread Q4 2012 5.1 6.2 th consecutive year that earnings grew 20%+; 2013 investment in marketing, catering

Papa John's (N. America) Q3 2012 5.0 5.7 raised FY 2012 earnings and sales comps guidance; hurricane expected to boost sales

Qdoba (system-wide) Q4 2012 0.4 2.1 looking to urther dierentiate rom competitors by elevating catering business

Ruby Tuesday, Inc. Q2 2013 0.3 1.9 new CEO; closing 13-unit Marlin & Ray's chain; looking to expand Lime Fresh

Ruth's Hospitality

Ruth's Chris Q4 2012 5.4 5.9 3-year growth above 20%; signed agreement to open ranchised locations in China

Mitchell's Fish Market Q4 2012 3.4 4.6 higher trafc (+5.4%) compensated or a lower average check

Starbucks (Americas) Q1 2013 7.0 7.0 execs cited "robust" holiday trafc; one in 10 U.S. adults received a Starbucks git card

Yum! Brands (U.S.) Q4 2012 3.0 6.0 both Taco Bel l and P izza Hut expanding into rural areas and with smaller units

* Sources: Company Reports, Colliers Research




estate pipelines, but also detailed investment in their service and onl

platorms. And dollar stores expansion counts are roughly in l

with , although shrinking margins and some slowdown in com

growth indicate that the segment may be maturing. We continue

monitor the dollar stores perormance and their merchandising sh

toward ood and daily needsand its impact on traditional supermarke

CANAdIAN ECONOMy slOws IN Q,AwAITs HIgH-pROFIlE RETAIl OpENINgs

The Canadian retail sector continues to expand and demonstra

broad-based health, although the pace o retail sales growth h

slowed considerably since but or some exceptional regio

markets. Despite recent layo announcements rom Best Buy/Futu

Shop (closing stores), and Sears (which closed several stor

last year), employment markets remain robust and consumers a

generally conident in their uture spending ability. We expect th

when Canadas ull-year retail sales data are released later t

month, they will relect a national growth rate o approximat

% even as spending slowed considerably in H ollowing

airly strong Q/Q. Looking ahead to , continued rock-bottointerest rates will support automobile purchases, as is also occurr

in the U.S., but higher household debt levels and slowing consum

condence will aect discretionary sales.

Our projected % retail sales increase in masks signiica

regional variations. Ontario and Quebec still represent well mo

than hal o Canadas billion total retail sales. The natu

resource sector will continue to spur Alberta and Saskatchewa

nation-leading sales growth, albeit at rates o only % over

Development activity will likely continue, i not at the torrid pace o

last ew years. I the Canadian dollar weakens on strengthening U

jobs and housing markets, its posit ive impact on Central Canad

vitally important manuacturing sector could prop up national statistby compensating or at sales growth on the coasts.

Canada has never experienced as much interest rom U.S. a

international retailers and developers as it has in the last three yea

Even i the Canadian dollar weakens, U.S. companies continue to vi

the Canadian market as an attractive investment opportunity. Targe

+ Canadian stores will begin to open next month; the compa

announced a partnership with iconic retailer Roots to stock limite

edition product. Meanwhile, Walmart will expand its Canadian netwo

to stores by investing million in construction and oth

costs. Nordstroms -store Canadian rollout wont begin until late

at earliest, but it will be a barometer o the national ret

economy and the depth o demand in Canadas luxury market.

Finally, Canada will see its rst true outlet malls north o the bord

as Simon Property Group, Tanger, and other established outlet dev

opers establish Canadian partnerships and stake claims in ma

markets. Colliers is aware o approximately outlet malls in th

planning stages, including two competing projects in the Toronto me

and two in Vancouver. As with most retail developments, must-hav

anchor tenants are the limiting actor or growth. Multiple cente

proposed in markets are intensiying competition as developers vie

secure retailers limited commitments.

Spent more than planned

Spent what they planned

Spent less than planned

No data

Sample Size:

105 companies

7%28%

25%

41%

RETAIlER CApITAl ExpENdITuREs, plANNEd VERsus ACTuAl

Source: Company -Ks and earnings reports, Colliers Research

BAlANCINg REAl EsTATE, supply CHAIN INVEsTMENTsWithin the context o omnichannel integration, retailers have

undergone a signicant shit in mindset. Gone, or the most part, are

deensive attitudes and tur wars between e-commerce and

brick-and-mortar operations, even i growth achieved by the ormer

comes at the expense o the latter. The retail industry has inally

recognized that to stay relevant, it must ully embrace and invest in amultichannel strategy. Incremental revenue gains achieved by early

adopters o this attitude, such as Walmart, Macys, and Nordstrom, only

urther emphasize the point. Nevertheless, in an environment still

dened by the cost-conscious consumer, companies remain ocused

on thoughtul investment and where best to allocate each incremental

dollar o their Capital Expenditures (CapEx) budgets. These investment

choices orce constant reevaluation o how best to balance real estate

and distribution/ulllment within corporate strategy.

Last spring, Colliers proprietary analysis o planned retailer

CapEx illustrated dramatically improved executive condence: % o

our sample set ( o companies) increasing their budgets year-

over-year, and % o companies by more than %. Comparingplanned to actual expenditures in , though, revealed a more

tempered execution. We acknowledge that we dont yet have complete

results: Less than hal o our tracked companies released results

beore we had to nalize this report. However, based on a combination

o year-end comments and extrapolating trends rom the end o Q,

we estimate that more than % spent less than they initially allocated

or the calendar year, with one-quarter o companies pulling back on

spending by more than %. We suspect that much o the decrease was

tied to the slowdown in the economy: Pep Boys, or example, disclosed

that it was pushing back some planned openings into .

Advance disclosures or 013 CapEx have generally been much less

detailed than what we received last year. Large-scale store openings

announcements (see chart on page 5) are concentrated in the Quick-Serve

and Restaurant categories (Dunkin Donuts, Cheesecake Factory, and BJs

Restaurants all investing more in new stores), home urnishings (Bed Bath

& Beyond, HomeGoods, Mattress Firm, and Sherwin-Williams), and

specialty stores such as Francescas and Urban Outftters that ocus on

accessories. All our major auto supply chains disclosed signifcant real


9/11



MExICOs RETAIl INVENTORy CONTINuEs TO ExpANdMexicos economic stability, which continued during

the second hal o , is reected in current consumer condence

levels; Decembers reading o was the years highest. Consumers

upbeat attitudes have been demonstrated through the upward trend in

retail sales. During rom through mid-, specialty stores

recorded the largest cumulative growth rate, .%, ollowed by super-markets at .% and department stores at .%.

Mexicos shopping center inventory, as measured by Gross Leasable

Area, has grown by % since (see chart below), and currently

contains shopping centers larger than , SM (, SF).

Power centers and ashion malls are the ormats most oten preerred

by developers. Retail projects are ocused on bringing luxury brands

and leading ashion companies to high-end malls. The trend toward

planning and construction o mega-projects such as Va Vallejo and

Centro Comercial Nuevo Sur has begun.

Retailers and developers remain condent doing business in Mexico,

judging rom retail development and redevelopment pipelines. Colliersis tracking shopping centers under construction, with a total net

leasable area o , SM. All but ive o these are ground-up

developments. eighteen shopping centers opened in , including

Town Center Rosario, a ,-SM power center in Azcapoltzalco and

anchored by Walmart and Sams Club, and Plaza El Dorado, a

,-SM ashion mall in Boca del Rio, Veracruz and anchored by

Liverpool and grocer Chedraui Select. For , Colliers is projecting

total shopping inventory to grow by .% and to reach a level o nearly

million square meters.

During Mexico received large amounts o domestic and oreign

investment: USD . billion in Q alone. This trend is expected

to continue. Mexican retailers are also paying closer attention totechnology as consumers use devices to purchase products.

FUll-YEAR OUTlOOk

NINE TRENds TO wATCHIn addition to the improving U.S. economy, and t

spillover eects which that are expected to lit the re

sector, heres what well be watching this year.

1MORE pART-TIME wORkERsThe retail industry is acing personnel challenges

it restructures customer service and selling programs to uncti

seamlessly across multiple channels. Even or companies with exce

tional reputations in brick-and-mortar customer service, expand

into e-commerce means an accelerated pace o transactionsa

dealing with customers who hold omnichannel to the same standa

as they do established in-store programs. As the majority

e-commerce inrastructure platorms are still in their inancy, there a

ar more places or customers to slip through the cracks. We expect t

retailers, as they continue to invest in systems upgrades, will optmitigate risk by adding more employees in both customer-acing a

back-ofce unctions. Restaurant operators are also being pressur

to prioritize service improvements and protect market share

patrons continue to scrutinize discretionary spending. Throughout

sector this should translate into more part-time employees.

2TAx REFORM FEARs dRIVE sAlETRANsACTION VOluME, CAp RATEs

The prospect o a year-end increase in the U.S. capital ga

tax rate motivated sellers and made Q a record-breaker or re

investment sales. Real Capital Analytics reported that total transact

volume reached . billion, up % rom , with individual as

sales driving most o the December surge. The newly adopt% capital gains rate, up rom %, is unlikely to materially imp

investors willingness to dispose o propertiesyet. As the tax reo

debate expands this year, though, the prospect o an addition

increase could launch another period o renzied dealmaking and th

i implemented, bring transaction activity to a standstill, especially

combined with signicant changes to exchange rules. Extre

cap rate compression over the past two years illustrates the imp

that lack o both quality inventory and yield-generating alternativ

had on pricing and transaction velocity, especially in the single-tena

net lease space. Investor demand or retail product has becom

an impetus or new development, just to create inventory that c

then be sold. In addition to the prospects o higher uture taxes,

specter o higher interest rates (given the coming change in FedeReserve leadership) should move a broader cross-section o selle

o the sidelines.

3BRICk-ANd-MORTAR RETAIlERsREEVAluATE sHIppINg pROgRAMs

Free shipping on purchases and returns began as a servi

dierentiator, but it has evolved into a cost o doing business or

retailers, especially brick-and-mortar chains looking to neutral

operational cost advantages enjoyed by pure-play online rms. Wh

retailers gain in customer loyalty, though, they sacrice in margins. C

0

100

200

300

400

500

5

10

15

2007 2008 2009 2010 2011 2012 2013*

# of Centers Total Square Meters (Millions)

MExICO sHOppINg CENTER INVENTORy

Source: Colliers Research | *projected

9

Continued on page




IN-sTORE FulFIllMENT: AlTERNATIVE TO sHIppINg?Brick-and-mortar retailers also have the option o expanding

in-store ulllment in lieu o risking potentially unpopular changes to

ree shipping programs. Walmart, Ann Taylor, Macys, and Pier are

among those experimenting with these programs that, in bringing

customers back into stores to pick up their orders, provide opportunitiesor incremental sales o in-store (and potentially higher-margin)

merchandise. Eective execution requires signiicant technology

investment to link sales and inventory tracking between distribution

centers and store locations, actored against predictive analyses o

customer buying patterns to better predict where specic merchandise

might be needed. Aside rom cost savings at the company level, the

uture real estate impact o in-store ulillment could be signiicant.

Retailers that succeed with ulillment programs could eectively

repurpose sections o their existing sales oor without needing to reduce

their ootprint, mitigating landlords downside risk rom vacancies.

Research estimated in October that ree shipping reduced gross

margins by up to basis points or the companies it covers.

Whats more, these estimates dont take into account January increases

by UPS, FedEx, and the U.S. Postal Service in shipping rates or

ground, air, and less-than-truckload reight. As we said in our Q

report, it would be disastrous or retailers to eliminate ree shipping

customers would revoltbut executives comments in recent earnings

calls suggest there wont be too many sacred cows in their quest to

rein in costs. Future program tweaks might include placing limits on

the amount o merchandise that can be returned without a penalty,

or raising the order dollar value that qualiies or ree shipping.

Another benet o more careully managed shipping programs: ewer

raudulent returns, which the National Retail Federation estimates

currently cost U.S. retailers . billion annually.

NEw, BlENdEd ROlEs FOR CORpORATE ExECuTIVEAs brick-and-mortar retail real estate companies rebuild th

organizations to operate multichannel selling platorms, the ne

changes could come in the executive suites. Traditional corpora

structures house separate divisions or real estate, marketi

management, inormation/technology, and merchandising (

retailers). As e-commerce/internet initiatives gained strategimportance in recent years, CEOs irst responded by reassign

or promoting an existing executive to ocus on what may still ha

been viewed as a niche business. Saks Incorporateds Februa

announcement that it is ormally tasking its senior executiv

with broader cross-channel responsibilities, and adjusting their tit

accordingly, is the rst o many corporate adjustments we expect t

year. More broadly, were also looking or realignments in leaders

o real estate versus online operations as more retailers combi

divisional sales reporting.

6 sMAllER pROTOTypEs ExpANd ANd EVOlVESmaller prototype stores will continue to open in

more leases come up or renewal and companies rationalize reestate operations. While much has been made in the past several ye

o the impact on real estate (inventory returned to market, difcu

re-leasing marginal spaces), less attention has been paid to how w

retailers are executing in these new, smaller spaces. Did they make

correct merchandising decisions? As we toured smaller prototyp

o existing box retailers this year, we were struck that the mo

successul onesCity Target, to name onedid not end up be

signicantly smaller than the parent chains existing ull-line ootpr

Thereore, shopkeeping unit (SKU) rationalization didnt need to

dramatic: it could avoid a massive product overhaul and the risk t

would accompany it. Looking at other chains that did launch w

signiicantly smaller prototypes, though, we were less comorta

with the execution. Too oten, square ootage downsizing can turn ian exercise in cost analysis: stock the store with only the most protaSKUs rather than conduct a thoughtul internal debate on how best

reinvent a retail brand in a smaller space. Well see how the perorman

o these smaller stores diverges in the coming year, especially as t

marketplace provides more opportunities to evolve: Some big box cha

that originally announced smaller prototypes (, SF to , SF) a

now moving right into testing o even smaller spaces, , to , SF.

Source: ICSC

5

4


11/11


|

COllIERs INTERNATIONAl

Union Street, Suite

Seattle, WA TEl +

FOR MORE INFORMATION

Ann T. Natunewicz | Manager

Retail Research | USATEl +

EMAIl [email protected]

James Smerdon | Vice President, Director

Retail Consulting | CanadaTEl + EMAIl [email protected]

Flavio Gmez Aranzubia | ManagerMarket Research | Mexico

TEl + ()

EMAIl [email protected]

CONTRIBuTORs

KC Conway

EMD, Market Analytics | USA

Jennier Macatiag

Graphic Designer | USA

ofces in countries on continentsUnited States:

Canada: Latin America:

Asia Pacic: EMEA:

$1.8 billion in annual revenue

1.25 billion square eet under

management

Over 12,300 proessionals and sta

400+ Retail proessionals in68 U.S. Ofces

Copyright Colliers International.

The inormation contained herein has been obtained rom sourcesdeemed reliable. While every reasonable eort has been made toensure its accuracy, we cannot guarantee it. No responsibility is

assumed or any inaccuracies. Readers are encouraged to consulttheir proessional advisors prior to acting on any o the materialcontained in this report.

Accelerating success.

OuTlETs, OuTlETs, OuTlETsDuring the early days o the economic recovery, outlet projects were among the ew

ground-up retail projects palatable to risk-averse lenders. Higher sales productivity did, and still

does, make retailers more receptive to paying higher rents, and consumers surging demand or

value-priced product suggests continued opportunity or sector growth. Late marked

the beginning o the surge in outlet center openings. Within the U.S. and Canada, we have

conrmed nine projects that will open in , with an additional three dozen announced orrumored (and more than hal o that total slated to open during the next months). Even with

this deep pipeline, retailers expansion plans are robust enough to suggest a shortage o inventory

and uture demand or even more space. How many o the proposed outlets will actually get built?

I they all open, how many will perorm well? Time will tell, especially in markets such as Toronto,

Charlotte, and St. Louis, where multiple projects are competing ercely or the same set o tenants.

8 FOREIgNERs sTIll THE u.s.It remains one o our avorite analogies: The U.S. is the cleanest shirt in the laundry

with respect to real estate investment. The concentration o quality assetsapproximately % o

the world commercial inventory according to Prudential Real Estate Investorsas well as the

U.S.s sae haven status will continue to comort oreign investors and attract capital this year.

Overseas investors, even those ocused on capital preservation, are moving away rom Treasuries

and arther out onto the risk curve. Sovereign wealth unds have stepped up, led by NorwaysNOK. trillion (USD billion) Government Pension Fund Global, which announced beore the

holidays that it would begin investing in U.S. real estate: one-third o its ve percent target or the

asset class. Gr anted, its rst commitment, announced last week, was or Core ofce space (a .

billion deal with TIAA-CREF), but we see retail as a viable recipient o sovereign unds seeking

partial interest in trophy assets either as an acquisition or a recapitalization opportunity with a

good partner.

9 INCREAsEd COMFORT wITH sECONdARy MARkETsSavvy investors recognized improving macroeconomic trends during , but the markets

risk-averse nature diverted the lions share o U.S. retail investment capital to Core markets despite

their record-low yields. During our meetings with institutions last year, we heard many o them

express interest in non-core marketsonly to cite the execution challenge (especially or those

representing oreign capital) o coaxing investors away rom the top ve or ten U.S. cities with well-understood market undamentals. Since Colliers began tracking secondary markets more than

months ago, we have tracked their accelerating improvements in housing and employment relative to

Core markets. Aided in some areas by business-riendly corporate tax policies, strong secondary

markets are becoming the economic growth engines that lit the perormance and prospects o local

real estate, especially or retail space which is so dependent on employment and consumer spending.

This well-dened shit in risk-reward tradeo is creating attractive yield potential on develop-to-core

strategies or the acquisition o higher-vacancy properties. We project a signiicant increase in

secondary market investment, rom both domestic and oreign capital, in , especially given uture

interest rate risk and increasing pressure being placed on institutions to deploy capital ater years o

conservative investing.

CONClUSION

Even as the economy improves, the retail real estate sector remains vulnerable to shocks

that aect both consumer and investor sentiment. However, the slow recovery rom the

, while it damaged aspects o the sector, also let behind as its survivors rms primed

to outperorm: they better understand what dierentiates them in the eyes o their customers and

know how they must operate to compete eectively. We expect process renement and brand

evolution to continue throughout the retail sector as competition intensies, continuing to

marginalize weak perormers and reward those with the vision and condence to innovate.

7

Documents

Colliers 2013 North American Retail Outlook