The Most Informative Event Covering Real Estate Investments

Retail eVolution:A New Beginning, Not the End as We Know It

Core, Retail Sales At All-Time High 28% Above 2008 Peak Nominal – 12% Inflation-Adjusted

$250

$275

$300

$325

$350

02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17*

Ret

ail S

ales

(Bil.

Mar

. 201

7 D

olla

rs)

* Through AprilTrailing 12-month average; adjusted for inflation using core PCECore retail sales excludes auto and gasoline salesSources: Marcus & Millichap Research Services, U.S. Census Bureau, BEA

+12%

* Through 1Q** Through April 2017Sources: Marcus & Millichap Research Services, BLS

-2.7

-1.8

-0.9

0.0

0.9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Qua

rter

ly J

ob G

row

th (M

illio

ns)

2016 Total: 2,240,0002017 Forecast: 2,000,000

+8.3 Million

-8.7 Million

+16.3 Million**

79 Months of Continuous Gains**Monthly Average: 199,000 Jobs

Recovery Has Added 16.3 Million JobsTotal Employment at All-Time High and Growing 2M/Yr.

Housing Market Recovery Finally a Driver of Growth

* Through MarchIncrease in consumer spending from housing wealth increase over 18-month periodSources: Marcus & Millichap Research Services, National Association of Realtors

$150

$175

$200

$225

$250

2003 2005 2007 2009 2011 2013 2015 2017*

Single-Family Condo

Med

ian

Pric

e (0

00s)

Median Home Prices

250

350

450

550

650

2003 2005 2007 2009 2011 2013 2015 2017*

Single-Family and Condo

Hom

e Sa

les

(000

s)

Existing Home Sales

Each home sale creates $5,200 in retail sales

$1 increase in housing wealth generates 5 cents

in spending

“Shift Happens”, Marcus & Millichap Retail Trends 2000

0%

4%

8%

12%

16%

93 95 97 99 01 03 05 07 09 11 13 15 17*

eCommerce Department Stores

Perc

ent o

f Sal

es

* Through MarchExcludes auto and gasoline salesSources: Marcus & Millichap Research Services, U.S. Census Bureau

Share of Core Retail Sales

Notable Examples of Displaced Retailers

Filed for Chapter 11 BankruptcyLiquidated and closed 226 stores

Sears Holdings restructuring program has closed 150 Kmart and Sears locations with plans to close

more

Filed 2nd bankruptcy in 2 yearsExpected to close 550 stores

Filed for Chapter 11 BankruptcyLiquidated and closed

all 450 stores

Filed Chapter 11 and later Chapter 7 Bankruptcy

Liquidated and closed all locations

$0

* Trailing 12 month through MarchExcludes auto and gas salesSources: Marcus & Millichap Research Services, U.S. Census Bureau

00 01 02 03 0504 100706 0908 11 12 13 17*161514

Online Shopping

eCommerce is Fastest Growing Sector of Retail Sales

$60

$15

$30

$45

Ret

ail S

ales

(Bill

ions

)

Successful Retailers in the eCommerce Age: Value, Nimble/Fast, Market and Consumer-Aligned

Off-Price Department

Store

Discount Stores

Fitness Warehouse Club

Quick-Serve Restaurant

Home Improvement

Health and Beauty Grocery Fast Fashion Wellness

Omnichannel Strategies Drive Convergence of Physical and Online

Physical

Online

OOmnichannel

8 out of the top 10 online retailers are traditional

Apple, Amazon & Microsoft collectively operate 400+

physical storesSources: Marcus & Millichap Research Services, eMarketer, Amazon, Microsoft Corporation, Apple Inc.

Demographics Trends Provide Triple Wave of Opportunity

* ForecastSources: Marcus & Millichap Research Services, U.S. Census Bureau

40

60

80

100

120

90 94 98 02 06 10 14 18* 22* 26*

Popu

latio

n (M

il.)

20 to 34 Year Olds

40

60

80

100

120

90 94 98 02 06 10 14 18* 22* 26*

Popu

latio

n (M

il.)

35 to 54 Year Olds

40

60

80

100

120

90 94 98 02 06 10 14 18* 22* 26*

Popu

latio

n (M

il.)

55+ Year Olds

10-Year Forecast+630 Thousand

10-Year Forecast+17.6 Million

10-Year Forecast+4.2 Million

17% 19%

19%20%

15%18%

3%

6%12%

11%16%

11%

12% 10%

6% 7%Travel

“Experience” and “Re-tailtainment” Major Forces in the E-Volution

As of 2015Sources: Marcus & Millichap Research Services, JPMorgan Chase

Entertainment

Dining

Home Improvement

Transportation/Fuel

Grocery

Retail

Other

Expe

rienc

es

34%28%

Millennial Boomers/Gen-XTravelEntertainment

Dining

Home Improvement

Transportation/Fuel

Grocery

Retail

Other

Experiences

$0

$15

$30

$45

$60

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*

Grocery Stores Bars and Restaurants

Consumers Spend More on Dining Out Than on Groceries for the First Time Ever

Tota

l Sal

es (B

illio

ns)

* Through AprilSources: Marcus & Millichap Research Services, U.S. Census Bureau, “Outlook on the Millennial Consumer 2014” report, The Heartman Group, Pew Research, Morgan Stanley

35%

49%

43%

Boomers

Gen X

Millennials

Eat Out at Least Once Per Week:

Unprecedented Wealth Transfer, Quest For Yield = CRE Capital Flows U.S. 2016 Population by Age

Sources: Marcus & Millichap Research Services, U.S. Census Bureau

3.0

3.5

4.0

4.5

5.0

18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

Popu

latio

n (M

illio

ns)

Age

$$$$30+ Trillion Wealth Transfer Over the Next 3 Decades

Excess Retail Space in the U.S. Compounding Demand Shifts(Retail Space / Capita)

Sources: Marcus & Millichap Research Services, ICSC Country Fact Sheet

0

7

14

21

28

U.S. Canada Australia U.K. France China Germany

Ret

ail S

quar

e Fe

et P

er C

apita

…… Market Forces are Correcting the Space Overhang Construction of Retail Lowest in a Recovery

* ForecastSources: Marcus & Millichap Research Services, CoStar Group, Inc.

4%

5%

6%

7%

8%

0

50

100

150

200

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*

Completions Vacancy Rate

Com

plet

ions

(Mil.

of S

qFt)

Vacancy Rate

$0

$50

$100

$150

$200

1.3

1.4

1.5

1.6

1.7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Inventory to Sales Ratio: Retailers

Corporate Profits-Retail Trade

Retail Earnings Exceed Prior Peak Thanks to Improved Inventory Management, Push Toward Efficiency

Rat

io o

f Inv

ento

ry to

Sal

es

* Inventory to sales ratio through 1Q; corporate profits through 4Q 2016Sources: Marcus & Millichap Research Services, U.S. Census Bureau, BEA

Corporate Profits-R

etail Trade ($ Bil. SA

AR

)

Ongoing Concerns Valid; Retail Closings Have Trended Lower

* Trailing 12-months through 3QSources: Marcus & Millichap Research Services, Bureau of Labor Statistics

50

100

150

200

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16*

Num

ber o

f Ret

ail S

tore

s C

losi

ng (0

00s) Vulnerable Sectors in 2017

• Department Stores• Electronic Stores• Interior Mall Stores

U.S. Retail Investment Sales Trends Have Slowed (For Now)

* ForecastIncludes sales $1 million and greaterSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

0

6

12

18

24

$0

$30

$60

$90

$120

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*

Dollar Volume Transaction Activity

Dol

lar V

olum

e (B

illio

ns)

Transaction Activity (000s)

Aging Baby Boomers Seeking Low Management Yield Boost Investment Activity in Net Leased Retail

* ForecastIncludes sales $1 million and greaterSources: Marcus & Millichap Research Services, U.S. Census Bureau, CoStar Group, Inc., Real Capital Analytics

40

60

80

100

120

90 94 98 02 06 10 14 18* 22* 26*

Popu

latio

n (M

illio

ns)

55+ Year Olds

0

3

6

9

12

01 03 05 07 09 11 13 15 17*

Tran

sact

ion

Act

ivity

(000

s)

Single-Tenant Transactions

+34%

10-Year Forecast+17.6 Million

Retail Cap Rate TrendsAverage Cap Rates vs. 10-Year Treasury

* Through May 18Includes sales $1 million and greaterSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

0%

3%

6%

9%

12% Single-Tenant Cap Rate10-Year Treasury Rate

Aver

age

Rat

e Cap Rate Average

10-Year Treasury Average

560 bps380 bps

0%

3%

6%

9%

12% Multi-Tenant Cap Rate10-Year Treasury Rate

Aver

age

Rat

e

Cap Rate Average

10-Year Treasury Average

630 bps480 bps

10-Year Treasury Yield Trends: “There is no reason to expect interest rates to rise dramatically”, Ben Bernanke – Retail Trends 2016

Current as of May 18Sources: Marcus & Millichap Research Services, Federal Reserve

0%

3%

6%

9%

12%

1900-1970 1970 to 1990 2000 2010 Current

10-Y

ear T

reas

ury

Rat

e

70-Year Avg. = 3.2%

National 10-Year Forecast Population Growth Rank by Metro

Top 5 MetrosLarge-sized Absolute Change Percent Change

Dallas-Fort Worth 1,489,000 20.5%

Houston 1,339,000 19.7%

Atlanta 1,252,000 21.6%

Phoenix 1,183,000 25.3%

Washington, D.C. 563,000 9.2%

U.S. Total 23,250,000 7.2%

Large-Sized Market Growth Leaders

Forecast: 2017-2026Sources: Marcus & Millichap Research Services, U.S. Census Bureau

Top 5 MetrosMid-sized Absolute Change Percent Change

Orlando 817,000 33.3%

Charlotte 657,000 26.5%

Austin 631,000 30.6%

Las Vegas 594,000 27.5%

Tampa 537,000 17.7%

U.S. Total 23,250,000 7.2%

Mid-Sized Market Growth Leaders

Drivers of Successful Retail Investing

1. Market and Location Still Matter and Always Will2. Massive Performance Variation by Type of Retail3. Nothing is Safe From Competition - Grocery Wars4. Dislocation or Opportunity? Think Re-Use, Value-Add as Major Players Exit “Bs and Cs) Personal Services, Medical, Education, Health

5. Valuations Under Pressure – Adjustments to be Expected but Major Correction/Doomsday Pricing Unlikely

6. Huge Buyer Demand for Well-Priced Assets7. “Wait-and-See” vs. Find and Act

The Most Informative Event Covering Real Estate Investments

Retail eVolution:A New Beginning, Not the End as We Know It