When value is king, outlet centers rule

Retail will continue to follow rooftops – both in cities and in the Sun Belt

Construction will be focused on creatively redeveloping existing space

A peek into what 2014 holds for retail

United States . 2014Retail Forecast

60 percent of all Saks stores are now outlets and 13 of the 15 planned stores for the next two years will be outlet stores

Jones Lang LaSalle • Retail Outlook • United States • Q2 2013 3

2013 has been a year of gradual improvements. Economic fundamentals have firmed rather than drastically improving. Vacancy rates have notched down by tens of basis points. Rents are finally creeping upward with several standout markets.

We expect more of the same rate of progress in 2014. Despite more solid fundamentals and a recovering housing market, there still remain constraints in the system. Consumer confidence, while trending upward, remains elastic – dependent on external factors like fiscal policy and the stock market. The government shutdown has cast a pall over future outlook.

Given this economic landscape, we expect modest growth in absorption. Vacancy rates should continue to inch down 30 percent over the year as construction remains limited. Rents, having found their bottom, will head upward and gains will become more widespread across more markets. The lack of new supply will continue to tighten retail fundamentals next year.

RETAIL SUBTYPES Malls Malls continue to be characterized by polarization. Competitive centers (with occupancies above 80 percent) boast an average vacancy rate of close to 4 percent. Non-competitive centers will face increasing challenges in signing new tenant deals. These centers suffer from low traffic and tired décor and tenant mixes with more and more vacant spaces. Aggressively expanding retailers will seek vibrant malls with strong demographics, which will widen the chasm between center types. We should therefore expect to see robust rent growth in strong malls – where it will become increasingly difficult to find space – and increasing vacancies in dead or near-dead malls.

Opportunistic purchases of tertiary malls is winding down

Source: CoStar

Power centers Power centers have seen phenomenal growth in the last year or two, despite vacating big boxes. These large retailers (e.g., Borders) are being replaced in many cases by discounters like T.J. Maxx and Kohl’s, which continue to be successful coming out of the recession. Next year

Power center absorption, deliveries and vacancy

Source: CoStar

should see moderate compression in vacancies as expanding retailers are balanced out by those that are consolidating, or moving to smaller spaces.

4 Jones Lang LaSalle • Retail Outlook • United States • Q2 2013

Outlet centers Since the recession, there has been a renewed interest in value. As a result, outlet centers have performed outstandingly in recent years with developers racing to bring more centers to market to meet growing demand. With an influx of new development and redevelopment, the quality of outlet retailers has become more sophisticated and upscale. Eyeing large revenue gains, luxury brands and department stores – which once fought hard against the off-price concept – are dipping their feet into the outlet pool. In fact, for some luxury department stores, outlets now outnumber regular stores:

• 60 percent of all Saks stores are now outlets and 13 of the 15 planned stores for the next two years will be outlet stores.

• Nordstrom now has 127 Nordstrom Rack stores, with another 17 planned by the end of this year and 30 more in 2014.

There are currently approximately 41 planned Phase I outlet projects in the United States, totaling over 14.7 million square feet. Eight of these projects are projected to be delivered next year:

Outlet center stats

# of U.S. outlet centers 185Total outlet center GLA 70.9 million s.f.Prior 12-month sales (through Q3 2013) $681.7 millionNumber of properties sold (prior 12-mth) 11Average price per square foot (prior 12-mth) $168.00 Average outlet center sales p.s.f. $342.89Average base rent $29.76 p.s.f.Source: VRN, RCA

Apparel chains planning to add 6 or more outlet stores in the next year

Source: Value Retail News

Planned 2014 Phase I Outlet Center Openings

Center City State Total s.f. Developer

Paragon Outlets Twin Cities at Eagan Eagan MN 600,000 Paragon Outlet Partners/Simon Property Group (SPG)

The Outlet Shoppes at Louisville Louisville KY 374,000 Horizon Group Properties

Gloucester Premium Outlets Gloucester NJ 360,000 SPG/PREIT-Rubin

The Outlets at Springfield Springfield IL 340,000 Global Outlet Management

The Outlets at Tejon Ranch Bakersfield CA 328,000 Tejon Ranch Co./Rockefeller Group

Tanger Outlet Center Foxwoods Mashantucket CT 314,079 Tanger Outlet Centers

Assembly Row Somerville MA 313,000 Federal Realty

Outlets at the Border San Diego CA 133,200 Shamrock Group

Source: NRF

New development

64%

Redevelopment30%

Expansions6%

Construction PipelineCategory s.f. (millions)

New development 14.7

Redevelopment 6.9Expansions 1.5

New development constitutes more than two-thirds of current outlet construction

Source: Value Retail News

Jones Lang LaSalle • Retail Outlook • United States • Q2 2013 5

27% 20%

6%9%

23%

8%

34%58%

10% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 H1 2013

User/Other

Private

Public Listed/REITs

Cross-Border

Institutional

Private investors monopolize urban retail

Source: Real Capital Analytics

Urban retail In-migration into urban cores will continue in 2014. These locales are favored by young millennials who love bright, vibrant city life with plenty to do (48 percent surveyed live in downtown or in cities right outside downtown), as well as aging Boomers looking to downsize and attracted by walkable communities. Urban retail properties are in ultra-high demand by investors. Sales of urban and luxury retail in the U.S. doubled from 2011 to 2012 to $8.4 billion. Manhattan numbers, in particular, skyrocketed from $670 million in the second quarter of 2011 to $3.2 billion in the fourth quarter of 2012.

Retailers looking to expand in downtown locations

Retailer Category Planned stores (12 months)

Spirit Halloween Stores Gift Specialties 5000

Dollar General Discounter 650

Five Guys Burgers and Fries Restaurant (family) 600

Halloween City Gift Specialties 500

Family Dollar Discounter 500

Zara Apparel - family 370

CVS/Pharmacy Drug store 300

Starbucks Coffee shop 200

Giorgio Armani General Store Apparel - specialty 76Urban Outfitters Apparel - specialty 60

Apple Stores Computers 50

Au Bon Pain Food/Beverage 28

6 Jones Lang LaSalle • Retail Outlook • United States • Q2 2013

MAJOR TRENDS FOR 2014 Redevelopment New deliveries in most markets will continue to be minimal in 2014. With the supply spigot set on low, and dead centers a growing reality, developers will turn to renovations to draw consumers to centers. Upscale theaters that feature expanded food and beverage menus and luxurious reclining seats are popping up in many major markets. These spaces are being designed in such a way as to allow them to be easily – and affordably – retrofitted to a vanilla shell if necessary. Other projects will involve a greater presence of technology (mobile phone scanners, NFC devices, kiosks, virtual walls) in stores, as consumers demand a seamless shopping experience. Updated food courts and a wider array of restaurants will also gain traction in 2014.

Retailers follow rooftops As supply remains low across most markets, growth will be most prominent in areas where population is booming. Currently, the greatest population expansion seems to be in the Sun Belt, where the housing bust was at its worst. Now that housing is trekking upward once

more, the largest demand for homes will be where the greatest price reductions were seen; namely, markets such as Las Vegas, Phoenix and Florida markets.

Grocery game The (non-)hunger games will continue to play out among grocery stores. Big-box discounters (Target, Walmart), drugstores and dollar stores are adding more and more food-stocked shelves to their aisles in an effort to gain consumer dollar share – and it’s working. Competition will get tighter next year with conventional supermarkets bearing the brunt of losses. Specialty/upscale/organic stores like The Fresh Market, Sprouts and Whole Foods will continue to shine.

Pop-up stores Pop-up stores have proven to be a successful recipe for growing traffic, filling vacant space (temporarily and also permanently) and keeping tenant mix fresh. As more shops pop up during the holidays, we expect the trend to stick around in the new year, as some stores become permanent.

San Francisco

Los Angeles

San Diego

Las Vegas

Phoenix

Dallas

Houston

Tampa

Miami

Fort Lauderdale

Palm Beach

Orlando

Atlanta

Charlotte

Chicago

DC

New York

Boston

1% - 2%

2.1% - 3%

Over 3%

Color –Job growth key

Size –Population growth key

1.5%

3.1%

Seattle

Expect rent growth in the markets with the greatest growth in population over the next three years

Retail will follow rooftops

Redevelopment projects will involve a greater presence of technology (mobile phone scanners, NFC devices, kiosks, virtual walls) in stores, as consumers demand a seamless shopping experience

© 2013 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $46.7 billion of real estate assets under management. For further information, visit www.jll.com.

As the leading retail service provider, Jones Lang LaSalle Retail manages the largest third-party retail portfolio in the country. The firm’s 94 million-square-foot retail portfolio consists of more than 300 regional malls, strip centers, power centers, lifestyle centers, ground-up development projects, mixed-use centers, transportation terminals and 9,000 retail ATM’s and bank branches across 50 states. Globally, Jones Lang LaSalle (NYSE: JLL) has a retail portfolio of more than 400 million square feet of property under management and leasing, including more than 10,000 retail locations on four continents. Jones Lang LaSalle is the only global real estate services firm with a team of dedicated, full-time experts who deliver comprehensive and globally integrated services in Energy and Sustainability under one umbrella. The firm offers leading-edge, industry-unique technology, training and tools in energy and sustainability to maximize the benefits for its clients and the greater community. For more information on Jones Lang LaSalle Retail, visit www.jllretail.com.

For more information, please contact:

Greg Maloney President & CEO Retail Americas + 1 404 995 6315 Greg.maloney@am.jll.com

Aaron Ahlburn Industrial & Retail Research Director, Americas +1 424 294 3437 Aaron.Ahlburn@am.jll.com

Keisha McDonnough Research Analyst Retail Americas +1 954 990 0844 Keisha.mcdonnough@am.jll.com

About Jones Lang LaSalle

About Jones Lang LaSalle Retail