Retail Commercial Real Estate Market

Richmond, Virginia

2006 Year in Review – 2007 Preview

Technology Changes in the Commercial Real Estate Industry

Groundhog day isn’t just for the weather – our little secret

Statistics & Market Fundamentals

9.5%

6.6%7.4% 7.2% 7.0%

7.8% 7.6%7.3% 7.3%

4%

5%

6%

7%

8%

9%

10%

Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06

Vacancy continues to stay remarkably low despite on-going development

Compare to office: 14.4% and industrial: 10.5%

8 consecutive quarters south of 8%!

Construction has fallen since the phenomenal year of 2003, but will ramp up again soon

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2003 2004 2005 2006

Short Pump Town Center and Stony Point Fashion Mall arrive

(500,000)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2003 2004 2005 2006

Except for very specific pockets of low occupancy (such as the Cloverleaf Mall area), net absorption has been virtually neutral since 2003

Short Pump Town Center and Stony Point Fashion Mall arrive

Commercial retail land values continue to ascend as land becomes more scarce. The success of retail market fundamentals lures

developers to pay increasingly higher prices.

$725,000

$745,000

$765,000

$785,000

$805,000

$825,000

$845,000

$865,000

Apr 05 Jul 05 Jul 05 Nov 05 Nov 05 Jan 06

Price/Acre Log. (Price/Acre)

Pricing trend line

In the example above, a trend is shown for vacant land on West Broad Street in Henrico County between two and ten acres with

an average of 5.8.

As if it were a mirror image of the office sales market, the retail market fell from its staggering heights of 2005. Last year was a near perfect confluence of

investment drivers.

23

34

25

913,511

3,335,634

1,395,763

10

20

30

40

2004 2005 2006

Tran

sact

ions

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Squa

re F

eet

Transactions Square Feet

Although volume was down from 2005, the price/s.f. variable rose nicely in 2006 with the help of major transactions such as Parc Place @ Short Pump

(83,000 sq. ft. at $316 per/sq. ft.)

$84

$276

$179$92.29

$82.66

$128.08

$0

$50

$100

$150

$200

$250

$300

2004 2005 2006

Mill

ions

Vol

ume

$60

$70

$80

$90

$100

$110

$120

$130

$140

Avg

. Pric

e/SF

Volume Avg Price/SF

What was it about 2005 that made the investment sales market so hot?

• Low debt rates

• Ample capital funding

• Aggressive lenders

• Highly appreciated properties

• Strong fundamentals (i.e. vacancy & leasing)

• Weak investment alternatives (stocks, bonds, treasuries, CD’s, etc)

• Flat yield curve (long term rates nominally more than short term rates)

• Falling unemployment

• Strong housing market (recovering economy)

• Cap rate spread (the cap rate [1st year operating income yield] is higher than the 10 year treasury yield)

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

1 Year Treasury Yield 10 Year Treasury Yield

Jan 00 Jan 04 Jul 05 Dec 05

What do we mean by a flat yield curve?

2004 normal curve, the investor is “rewarded”for investing in longer term instruments.

Source: US Dept of Treasury

2000 slightly flattened curve, but look how high rates are!

2005 the curve is gone, rates are much lower than a few years ago. Investors lose incentive to invest in long term instruments, thus they turn to commercial real estate.

What do we mean by a cap rate spread?

5.00%

7.25%

4%

5%

6%

7%

8%

10 Year Treasury Yield Cap Rate on Commercial Retail Property

The difference between the cap rate and the 10 year treasury yield is the “spread”. In this case 2.25%. The larger the spread, the more incentive the commercial real estate investor will have.

An example of weak investment alternatives (Dow Jones equities)

You invest in Jan 04

You sell in Nov 06

You’re yield is a whopping 0% over 2 years! Actually less when you consider opportunity cost.

Economic Environment

The majority of economic variables are favorable for the retail market

Note the difference between the local and national unemployment rates

Not exclusively a negative. Lower productivity means that technology has replaced less people in the workforce, meaning there is more discretionary income available.

New Development !!

Not a typo

7,321,000 square feet (potentially) on the horizon

Reynolds Development Company167,000Reynolds Crossing

Blackwood Development170,000Northcross Center

Breeden Company175,000Towne Center West

Marchetti Properties180,000Stonehenge Village

Crosland Inc.195,000Chippenham Place

Marchetti Properties200,000Staples Mill Square

Archon Group200,000The Corner at Short Pump

Millennium Retail Partners LLC250,000Millennium Town Center

Rebkee Company275,000Shoppes at Westchester

James Doran Company320,000Midlothian Towne Center

Continental Properties360,000Woodlands Costco

Unicorp425,000West Broad Village

Dewberry Capital450,000Azelea Square

EDCO LLC540,000Hancock Village

Forest City and Pruitt Properties914,000White Oak Village

Zaremba Group and Metropolitan Partnership1,000,000Westchester Commons

Casey Sowers1,500,000Roseland Proposal

DeveloperSizeProject

Where are the new developments going to be?

The Watkins Centre (Westchester Commons): 1,000,000 sq. ft. of retail

Primary retail development location

West Broad Village: 425,000 sq. ft. of retail

Retail portion

Hancock Village: 540,000 sq. ft. of retail

Our Main Topic:

Technology Changes in the Commercial Real

Estate Industry

Third-Party Data Providers

CoStar Group

CoStar Group

• Web based inventory of every commercial property in region (as well as national and UK coverage).

• Comprehensive property information such as size, year built, occupancy, zoning, acreage, parcel information, building height, owner, leasing representative, etc.

• Detailed space availabilities include square feet, asking rates, pass-through, term lengths, floor, contiguous space, floor plan, length of time on market, etc.

• Retail specific information including road frontage, parking spaces, anchor name and size, traffic volume, number of stores, etc.

• Entire level of functionality dedicated to the retail industry:

• Proximity to other retailers

• Demographics of area

• Type of center (regional mall, strip mall, neighborhood center, free-standing, outlet center, restaurant, convenience store, etc.

CoStar Group – Basic retail search screen

CoStar Group – Retail location search screen

This option allows you to draw your own area down to the smallest detail, such as which side of the street you want

CoStar Group – Retail detailed level search screen

Each of these tabs has many more parameters which you can use to further specify your criteria

CoStar Group – Retail search results screen

Notice all the additional functions you can perform once you have your results set.

CoStar Group – Property profile screen

MapInfo/Anysite

MapInfo/Anysite – High resolution aerial photography, easy to annotate with logos, text, and graphics

MapInfo/Anysite – Easily highlight, identify, query, export, annotate, etc every parcel in Richmond, Chesterfield, Henrico, and Hanover

MapInfo/Anysite – Easily plot competitors locations, potential expansion sites, area attractions, affiliated companies, etc

MapInfo/Anysite – Thematic shading including demographics, precision identification of demographic variables (hot spots), weighted variables,

custom queries, etc. – no problem

MapInfo/Anysite – Drive time analysis, integration of outside data (such as employee residences) – piece of cake

LoopNet

LoopNet – an international web-driven website with virtually every commercial listing in the county. Serves two purposes: 1) we can advertise

your property and 2) we can search for properties that fit your criteria.

IRIS & Tempo

IRIS – Allows searches for any parcel in any area county by numerous parameters. Results can be mapped or exported.

Tempo – A simplified version of IRIS, also through the Richmond Association of Realtors. Full parcel data available.

Other Third-Party Data Providers• Real Capital Analytics: Web-based data warehouse of investment and user sales covering the U.S. and all property types. Also provides industry insights on current market trends.

• Hoovers/OneSource: Web-based business data warehouses allowing the ability to search by any number of parameters for potential customers, industry contacts, etc.

• Retail Tenant Directory: Massive database of U.S. retailers, searchable for any number of variables.

• CCIM.net and CCIM Site to do Business: From the Certified Commercial Investment Manager’s Institute, it provides several business tools including sophisticated mapping, business searches, demographics, contacts, industry news, listing services and much more.

• REIS: Web-based commercial services platform offering market statistics, trends, and comparables for most U.S markets.

• Several additional listing services that allow for detailed searching as well as marketing of your properties:

• Property Line

• Cityfeet

• Totalcommercial

• Black’s Guide

Most commercial firms are affiliated with: CCIM, ULI (Urban Land Institute), SIOR (Society of Industrial & Office Realtors), BOMA (Building & Operations Management Association), CPM (Certified Property Manager), NABE (National Association of Business Economists) and many more. In other words, the industry is very well trained.

Financial Analysis Tools

ARGUS

ARGUS – What is it?• A highly sophisticated financial modeling program designed specifically for the commercial real estate industry

Sounds OK – What can it do for me?If you are looking to either buy or sell commercial property, it will make your decision process infinitely easier by giving you:

• Precise and detailed cash flow statements

• Financial ratios: IRR, LIRR, annualized yield, payback period, equity yield (cash on cash return), ROI, annualized appreciation, required rates of return, capital accumulation of value, debt service coverage ratio, operating expense ratio, discount rates, positive cash flow test, present valuation/NPV, IRR deficit/premium, cumulative cash flows, tax implications on yield, etc.

• Disposition analysis (pre and post tax), cost recovery, tax shelters, deductions & tax benefits, etc.

• Assumptions analysis: rent roll, lease rates, escalations, TI, commissions, capital reserves, renewal

probability, length of vacancy, operating expenses (including pass-throughs), expirations, occupancy, etc.

• Your investment risk premium

ARGUS – My investment risk premium? What in the world is that?

Let’s flip a coin !

ARGUS – What do the results look like?

Industry analysts will generally assist their clients with recommendations based upon years of training and experience.

Other Financial Tools• Pro-Calc: A Microsoft Excel based lease analysis program which can be done from the viewpoint of the lessor or the lessee. It can also compare up to eight leases side by side for easy visual analysis. It will help you decide on your best leasing option.

• Lease vs. Buy Analysis: Should I lease or buy a property, what are benefits of each, what are the tax consequences, which will have a higher yield? These are just some of the questions you will have answered with our industry software.

•Valuation: What is my property really worth? What is the property that I am interested in acquiring really worth? Am I under-pricing or over-paying? AREN’T THEY ALL THE SAME? NO!

• Lease Analysis: Similar to Pro-Calc, but can be customized for a specific client under unique circumstances.

• Buy vs. Buy Analysis: Which building is the better purchase?

• Build vs. Buy Analysis: Should I build a property or buy it?

• Land lease rate: If I lease my land, how much should I charge in order to have a higher yield than selling it? How will I know if I will be reaching my required rate of return on the lease?

• Basically, anything else you want evaluated.

Databases

DatabasesMost commercial brokerage firms will maintain multiple databases that provide in-depth information on a wide range of topics. Some of the most popular are:

• Improved sales comparables: includes date, price, price/sf, cap rate, occupancy at time of sale, buyer, seller, etc.

• Unimproved (land) sale comparables: includes date, price, price/acre, PIN number, zoning, usage, legal description, buyer, seller, etc.

• Lease comparables: includes date, property type, square feet, length of term, base rent, escalation, free rent, TI, effective rent, etc.

• Properties: includes address, square feet, use, year built, # tenants, asking rents, vacancy, etc.

Often, these databases will be set up as an “enterprise system” which allows analysts to run detailed queries on virtually any set of parameters possible. The individual databases can be linked to each other through common fields such as property address. These systems allow analysts to pull valuable information in minutes to assist retail clients in making the most informed decisions possible.

Databases – Typical user interface of an industry database system

Each “button” opens the door to many more sub-menus

What to Expect in 2007

What to Expect in 2007• Rental rates

• Trending higher, particularly near Rte 288. Highest asking is apprx $38 in the premium areas such as Short Pump and Western Hull St Rd corridor.

• Land prices

• Progressively trending higher, again primarily in high income, high growth areas such as Short Pump and Western Chesterfield along Rte 288. Apprx $1m/acre for premium land.

• Tenant vs. landlord leverage

• Landlords have a bit of influence over the market as vacancy is still extremely low, and tenant demand is not waning. The strong economy further underpins the Landlords leverage.

• Development trends

• 7.3 million s.f. on the drawing board – that is basically a 20% over the current inventory. An issue starting to be raised is “will there be enough employees to staff these stores?”

• Winners/losers

• Winners: Landlords, land owners, county tax revenue, retail employees Losers: commuters, retail employers needing an abundance of staff, older/closer in retail ctrs.