A PUBLIC STRATEGY FOR TODAY’S RETAIL REALITYICSC Northern California Alliance Program 2009

PanelPanel

PresentationsJanet Smith-Heimer, Managing Principal, BAE

Retail Trendse a e ds

Retail Store Closures

Garrick Brown, Senior Retail Research Director USA, Colliers InternationalCommercial Real Estate – The Next Crisis?

Panel Discussion – Public StrategiesPanel Discussion Public StrategiesDoug Wiele, President, Foothill Partners

Bill Lambert, Assistant Director of Economic Development, Alameda County Redevelopment Agency

Leslie Parks, Director of Downtown Management, San Jose Redevelopment Agency

The Good News – Expanding Retailers

RETAIL TRENDS & STORE CLOSURESJanet Smith-Heimer, BAEbae

Why Do We All Care About Retail?Why Do We All Care About Retail?

D l /R il L l GDevelopers/RetailersLocation

Local GovernmentsLocation

Accessibility Attracting shoppers

AccessibilityPlacemaking / R i li iRevitalization

OOccupancySales per square foot

OccupancySales per square foot

Return on Investment Tax Revenue to General FundGeneral Fund

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Impact of RecessionImpact of Recession

l / lDevelopers/RetailersSlowed development projectsRi i i / l l Rising vacancies/ lower lease ratesClosing storesB k t b iBankrupt businesses

L l GLocal GovernmentsDeclining tax revenuesSl d it li ti j tSlowed revitalization projectsEmpty stores/blighted landscapeJob lossesJob losses

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National Sales TrendsNational Sales Trends

US retail sales grew steadily h h hi through this decade…

Until 2008Until 2008

Source: Monthly Retail Trade Survey, U.S. Census, June 11, 2009 Release.bae

Recent National Sales TrendsRecent National Sales Trends

Sales started to plunge in A 2008 Aug 2008, to unusual low in Dec 2008

Sales starting to tick up in Aug 2009Aug 2009

Source: Monthly Retail Trade Survey, U.S. Census, June 11, 2009 Release.bae

Bay Area Per Capita SalesBay Area Per Capita Sales

Accounts for changes in

l ipopulation

Shows 2007 declining on declining on adjusted per capita basis

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Major Impact of Recession: Retailers Closed or Closing

Mervyn’sCircuit City

Steve & Barry’sValve Cityy

GottschalksShoe Pavilion

yKB ToysWicks Furniture

YardbirdsBally FitnessLinens N Things

LevitzGoody Family ClothingCacheLinens N Things

Sharper ImageBombay and Co.

CacheMovie GalleryWilson Leathery

Bailey, Banks & Biddle

bae Sources: Metrovation & Collliers International

More Impacts of Recession: Retailers Closing Stores or Filing Chapter 11

BBQ Galore Filed Ch 11Ann Taylor Closing 117 stores

Disney Stores Closing 100 + storesGoodys Closing 103 storesy g

Cost Plus Closing 26 storesTalbots Closing stores Macy’s Closing 11 storesJ Jill Closing stores

Goodys Closing 103 storesBenigans Steaks Closing 150 storesBoscovs Filed Ch 11Against All Odds Closing W. Coast stores

J Jill Closing stores Shane Co Filed Ch 11Foot Locker Closing 140 storesGap Closing 85 stores

Black Angus Closing stores Ritz Camera Closing 100 + StoresLane Bryant Closing 150 storesEddie Bauer Closing 27 storesp g

Sprint/Nextel Closing 133 storesEthan Allen Closing 12 storesPep Boys Closing 33 storesZales Jewelers Closing 105 stores

Eddie Bauer Closing 27 storesHome Depot Closing 15 storesPacific Sunwear Closing storesJC Penney Closing stores

Zales Jewelers Closing 105 stores Dillards Closing stores

bae Sources: Metrovation & Collliers International

Impacts of RecessionImpacts of Recession

Falling salesClosing storesgEmpty storefrontsCl i t d lClosing auto dealersStalled projects

Where is this all going?Where is this all going?

Compact Car Parking at Targetbae

COMMERCIAL REAL ESTATE - THE NEXT CRISIS?Garrick Brown, Colliers International

The Next Shoe to Drop

The New Foreclosure CrisisThe New Foreclosure Crisis

$3.5 Trillion in total outstanding CRE Debt (according to Federal Reserve)( g )

$2.6 Trillion held by banks

$900 Billion CMBS

Approximately $1.155 Trillion in CRE debtApproximately $1.155 Trillion in CRE debt coming due through 2012

$1 Trillion held by banks$ y

$155 Billion CMBS

Amount of CRE Debt Going Bad Through 2012?

We are already dealing with a number ofWe are already dealing with a number of banks on their distressed assets, as well as a number of CMBS special servicers.

Their individual estimates vary, but the consensus number we are hearing from lenders of all types is that they expect roughly 30% of their CRE loans to go bad over the next 36 months…

Some lenders are bracing for as much as a 40% failure rate.

Ab t h lf f th ti ill bAbout half of these properties will be retail…

30% Failure Rate Equals…

The New Foreclosure CrisisThe New Foreclosure Crisis

If 30% Failure Rate Holds…

Estimated $300 Billion in Bank Losses and $50 Billion CMBS

Expected Losses of $350 Billion Thru 2012Adjusted for inflation, the approximately $160B lost in the S&L crisis, would come out to roughly $250B in today’s dollars.

This is bigger than the Savings and Loan Crisis

And it should have hit us… already…

Pretend & Extend

“Pretend & Extend?”

Lenders are opting not to foreclose, but most are also not doing loan modifications or workouts either…

For many smaller regional and local banks, a tt f i lmatter of survival…

Attempt to hold back flood gates to lessen losses and to slowly release troubled assets tolosses and to slowly release troubled assets to the market to minimize pricing pressures…

Many are holding out hope for improving marketMany are holding out hope for improving market fundamentals to lessen problem…

Some hold out hope of government interventionSome hold out hope of government intervention or aid…

Inconsistencies in Pretend & Extend

Th h “P t d & E t d” i th idiThough “Pretend & Extend” is the overriding trend, we continue to see inconsistencies in how banks are dealing with troubled loans

Individual bank balance sheets play a role in these decisions…

Bank staffs are being overwhelmed by sheer numbers of problem properties…

Decisions often being made by loan officers whose expertise is in writing loans, not dealing with distressed properties…with distressed properties…

Decisions often are being made from afar by individuals with little local market knowledge…g

The Problem With “Pretend & Extend”…

Likely Kicking the Can…Likely Kicking the Can…

There are no more bailouts coming…

Retail fundamentals will continue to be weak for at least another three years…

There are already buyers on the sidelines… waiting…

There are now two types of REITS—bankrupt or raising capital through IPOs.

$20 Billi h b i d th h IPO$20 Billion has been raised through IPOs in last five months… to both pay down debt/save balance sheets and … to build

h t f th fi l twarchests for the firesale to come…

The Problem With “Pretend & Extend”…

Clouding the BottomClouding the Bottom

Without “Pretend & Extend” we would be looking at shorter, but VERY sharp g , pmarket correction…

Pricing declines from peak of anywhere from 50% to 80% for some property types, with pricing schism between quality, stabilized product with solid occupancy vs. weaker properties…

The Problem With “Pretend & Extend”…

Prolonging the Inevitable…Prolonging the Inevitable…

The asset bubble has burst already.

Deals are not happening yet, because time is on the side of opportunistic buyers… and they know it.

There are buyers waiting on the sidelines NOW… but they want 10% to 12% caps… not the 8% and 9% caps we see being offered…

S l ti it lik l till t l t i thSales activity likely still at least six months off until flood of distressed assets results in pricing declines of at least another 10 to 15%15%...

Looking Ahead: Worst Case Scenario

When it comes to crisis, Fed is hoping to if t ll d d litimanage as if controlled demolition.

Assuming they can’t…

Economic recovery remains weakEconomic recovery remains weakCRE fundamentals worsenPretend & Extend only prolongs problem until lenders are overwhelmed by sheeruntil lenders are overwhelmed by sheer volume of distressed assetsToo many small and regional banks fail at once (1,500 institutions or more in thisonce (1,500 institutions or more in this scenario)…Credit markets seize up againDouble dip recession…p

NOT LIKELY…

Looking Ahead: Likely Case Scenario

CMBS Losses Mildly Diminished by Policy:Recent Extension of TALFRecent Extension of TALF Recent Tax Changes Continued Extension of TALFFurther Policy TweaksFurther Policy Tweaks

Small and Regional Banks Devastated1,000 banks fail,Pretend & Extend helps some banks to survive, but ultimately prolongs crisis…

CRE values drop another 20% in marketplace with murky bottom. Process takes five to seven years to work through system, with CRE values depressed

Recovery significantly weighed down, but not d il d b i iderailed by crisis.

It’s Happening Already

8,204 US Banks Remaining

Roughly 100 Have Collapsed in 2009

Over 415 on FDIC “Watch List”Over 415 on FDIC Watch List

FDIC looking into borrow billions from “Healthy Banks” to deal with pending crisisy p g

The victims will not be the “Big 3” but banks small enough to let fail…

Excellent Website to Research Individual Bank Health:http://banktracker.investigativereportingworkshop.org/banks/

WHAT DO WE DO NOW?Panel Discussion: Leslie Parks, Doug Wiele, & Bill Lambert

THE GOOD NEWSExpanding Retailers and Restaurants

Retailers - ExpandingRetailers Expanding

Anna’s Linens 7-10,000 sfApple Computer 3-5 000 & 15-20 000 sf

DSW 15-25,000 sfFamous Footwear 5-8 000 sfApple Computer 3 5,000 & 15 20,000 sf

Avis Car Rental NABatteries Plus NABed Bath & Beyond 20-30 000 sf

Famous Footwear 5 8,000 sf (malls)

Fantastic Sams 1,200-1,500 sfFoods Co 65-80,000 sfBed, Bath & Beyond 20-30,000 sf

Brooks Bros 8-10,000 sfCPK 5,000 sfCarter’s/OshKosh 2 4 000 sf

,Forever 21 2,500-90,000 sfGamer Doc 800-1,500 sfGame Stop 1,200-2,000 sfCarter s/OshKosh 2-4,000 sf

Children’s Place 4,000 sfStaples Copy 4,000 sfCiti Trends 5 000 sf

Game Stop 1,200 2,000 sfGolfsmith 20,000 sfH&M 10 – 40,000 sfHenry Markets 20-30 000 sfCiti Trends 5,000 sf

Cost Cutters 900-1,200 sfCostco 100,000 sf+Dollar Tree 10 12 000 sf

Henry Markets 20 30,000 sfHome Goods 25-37,000 sfJoAnn Fabrics 35,000 sfJos A Banks 4 500 sfDollar Tree 10-12,000 sf Jos A Banks 4,500 sfKohl’s 86-92,000 sf

Sources: Metrovation & Collliers International

Retailers – Expanding (cont….)Retailers Expanding (cont….)

Massage Envy 2,500-4,500 sf Sprouts Organic Grocery 20-30,000 sfSt l 15 000 fOld Navy 15-19,000 sf

Payless Shoes 2700-3300 sfPet Food Express 6,500 sf

Staples 15,000 sfStyles for Less 2,500-3,000 sfSupercuts 900-1,200 sfS C fPetco 12-15,000 sf

Party City 12,000 sfRack Room Shoes 6,000 sf malls

Sylvan Learning Centers 1,600-2,500 sfTarget 125-175,000 sfThe Avenue 4,500 sf

Rainbow 5,000 sfSleep Train 5,000 sfSmart and Final Extra 25-30,000 sf

TJ Maxx/Shoe Store 10,000 sfVilla Sport 70-80,000 sfWalgreens 14,500 sf

Sports Chalet 40,000 sf Zara (malls) up to 14,000 sf

Sources: Metrovation & Collliers International

Restaurants - ExpandingRestaurants Expanding

Bad Ass Coffee up to 1,800 sfBeach Pit BBQ 2 – 2,500 sf

Golden Corral 11,000 sfHabit Burger 1,500 – 2,200

Big Swirl Yogurt up to 1,500 sfBoston Market up to 3,500 sfCheba Hut 2,000 sf

Java City up to 3,000 sfJimmy John’s up to 1,500 sfJohnny Rockets up to 3,500 sf

Churro Station (malls) 800 sfCici’s Pizza up to 4,200 sfEinstein’s/Noah’s up to 2,500 sf

Julie’s Thin Crust up to 2,500 sfL&L Hawaiian BBQ up to 2,500 sfMaos Vegetarian 1,000 sf

El Pollo Loco up to 3,500 sfExtreme Pita 1 – 2,000 sfExtreme Pizza up to 2,500 sf

Marco’s Pizza up to 1,400 sfMary’s Pizza Shack up to 4,000 sfMcDonald’s 4,000 sf Pad

Five Guys Burgers & Fries 1 – 2,000 sfFraiche Yogurt 800-1,500 sfFuddruckers up to 5,500 sf

Mr. Pickles 1 – 2,000 sfOld Chicago Pizza & Pasta up to 4,500 sfPacific Yogurt Partners up to 1,200 sf

Fuzio Universal Bistro 3 – 3,500 sf

Sources: Metrovation & Collliers International

Restaurants – Expanding (cont…)Restaurants Expanding (cont…)

Panera Bread up to 4,500 sfPho Hoa 2 – 4,000 sf

SF Sourdough Eatery N/AShakey’s Pizza up to 4,000 sf

Phoa Noodle 1200-1800 sfPinkberry up to 2,000 sfPizza Patron up to 1,200 sf

Smashburger 1,800 sfSpicy Pickle up to 1,800 sfSonoma Chicken Coop 5-8,000 sf Pad

Pizzeria Venti 2,500 sfPopeye’s Chicken 2,500 sf PadRed Mango up to 1,200 sf

Spoon Me up to 1,300 sfSubmarina up to 2,500 sfSubway 1 – 2,000 sf

Round Table Pizza 2 – 3,000 sfRubio’s Mexican Grill 2 – 2,600 sfSandella’s Flatbread up to 1,500 sf

ToGo’s up to 2,400 sfU-Food Grill (airports) 800 to 2,000 sfWahoo’s Fish Tacosup to 2,500 sf

Seller’s Markets up to 3,300 sf Wing Stop 1,500 sf

Sources: Metrovation & Collliers International