Q3 2009 Houston Retail Market Report

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THIRD QUARTER 2009

Retail Market HOUSTON MARKET RESEARCH | THIRD QUARTER | 2009

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R il Market Retail M k MARKET RESEARCH

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2009

Houston Retail Neighborhood Centers Lead Market

MARKET INDICATORS

Q3-08

Q3-09

Quarterly Net Absorption 826,360 SF 447,965 SF Overall NNN Rental Rate $16 00 psf $15 63 psf $16.00 $15.63

9.7%

Overall Vacancy 10.3%

Year-to-date Deliveries 1.9 Million SF Under Construction 1.4 Million SF

Houston’s retail market continued to record weak fundamentals through the third quarter 2009 with net absorption, occupancy and rental rates falling below levels posted at this time last year. Certain retail categories, however, performed better than others under the current economic stress test. Neighborhood centers led the market with year-to-date positive net absorption of 875,062 sq. ft. through the third quarter, while all other retail categories posted less than 200,000 sq. ft. of net gains in occupied space. Among the most significant decreases in year-to-date negative net absorption were single-tenant retail properties with 328 422 sq. ft., 328,422 f followed f ll d by b community centers with h 203,343 203 343 sq. ft. f and d malls ll with h 160,815 160 815 sq. ft. With tough economic conditions pummeling consumers, neighborhood centers will likely continue to be counted among the most resilient retail categories through 2010. As retailers continue to strategically position themselves to increase market share and win over increasingly value-conscious consumers, the local retail sector is experiencing an aggressive pricing war among key grocers led by Cincinnati-based Kroger and San Antoniobased H.E.B. Not to be left out, Randall Randall’ss Food Markets (acquired by Pleasanton, California Californiabased Safeway in 1999) has announced plans this year to significantly reduce prices as it attempts to rebrand itself from a high-end grocer to a more moderately priced store. Looking forward, Houston’s retail market is expected to remain soft with the local employment sector not likely to improve before the end of 2010. In the twelve months ending in August 2009, Houston job losses totaled 95,100 or negative 3.6% job growth. With few benchmarks available to measure what has come to be commonly referred to as the G Great Recession, the h duration d off the h current economic slowdown l d remains the h pivotall question in considering the outlook for the commercial real estate sector. Major challenges facing the overall market remain constrained credit, mounting job losses, and weak consumer spending. The interconnection of these key economic factors supports what many believe will be a slow recovery for both the overall U.S. economy and the retail sector.

JOB GROWTH & UNEMPLOYMENT ABSORPTION, NEW SUPPLY & VACANCY RATES Aug 08 Aug-08 HOUSTON Unemployment

Aug 09 Aug-09

-3.6% Job Growth 95,100 jobs lost 5.2%

8.4%

2 500 000 2,500,000

12%

2,000,000

11%

1,500,000

10%

1,000,000 TEXAS

-2.8% Job Growth 295,400 jobs lost

Unemployment

5.3%

8.1%

9% 500,000 8%

0

7%

-500,000 U.S.

-4.4% Job Growth 6,047,000 jobs lost

Unemployment

6.1%

9.6%

-1,000,000

6% 3Q-08

4Q-08

Absorption

1Q-09

2Q-09

New Supply

3Q-09 Vacancy

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Top Retail T R il L Lease 3Q 2009 Lunar Golf, Brazos Mall Southeast Submarket YTD 2009 RETAIL LEASES Target Pearland Parkway Village May-09 133,055 SF

Jan-09

Sep-09

JC Penney Teas Crossing 104,175 SF Lunar Golf L G lf Brazos Mall 58,800 SF

Gerlands Food Town El Dorado Shopping Center Apr-09 52,580 SF

Mar-09

Dustin Mount’s Post Oak Center 47,136 SF

Ashcraft European Bakery Quail Creek Center Feb-09 45,000 SF

Jan-09

Randall’s Palmer Plaza 35,182 SF

Family Thrift Center Sharpstown Plaza 33,862 SF May-09 Dynamic Fitness Shadow Creek Ranch Town Center Jul-09 33,700 SF

THIRD QUARTER 2009

Occupancy & Availability

Absorption & Demand

Houston s retail occupancy for all Houston’s product types combined slipped 60 basis points to 89.7 percent in the third quarter 2009, down from 90.3 percent at this time last year. This marked the fifth consecutive quarter – since the third quarter 2008 – that occupancy has decreased for the overall market. By property type, type several categories maintained occupancy levels above the 90 percent mark, while still recording significant year-over-year decreases. Lifestyle centers – open-air markets that in Houston have typically catered to a more affluent consumer – reported occupancy down 200 basis points to 91 8 percent in 91.8 i the h third hi d quarter, from f 93.8 percent at this time last year. Power and community centers also posted lower occupancy at 92.7 percent (from 95.4 percent) and 86.2 percent (from 88.1 percent), respectively.

Houston s retail market recorded Houston’s positive net absorption of 447,965 sq. ft. in the third quarter, an improvement from the negative net absorption in the second quarter. An overall slowdown in tenant demand for retail space was reflected in the year-to-date positive net absorption of 629,357 sq. ft., far below the 3.4 3 4 million sq. sq ft. ft of absorption gains recorded through the third quarter last year.

Notably, only two categories – outlets and d neighborhood hb h d centers – recorded d d slight occupancy increases to 97.9 percent (up 120 basis points) and 87.4 percent (up 50 basis points) from one year ago. With consumers spending expected to remain low while local job losses continue to weigh down the economy, discount retail and groceryanchored centers may continue to lead the market through next year.

Major retail tenant move-ins in the third quarter contributing to the overall positive net absorption included Gerlands Food Town’s 52,580 sq. ft. lease at El Dorado Shopping Center (Clear Lake); Sports Authority’s 42,000 sq. ft. lease at Pearland Town Center (Pearland); Barnes & Nobles’ 35,091 sq. ft. lease at River Oaks Shopping Center (Midtown); Gallery Furniture’s 22,500 sq. ft. lease at 9524 Westheimer (Westheimer) and Spec’s Liquors and Fine Foods’ 20,047 sq. ft. lease at 4102 FM 762 (Rosenberg).

Rental Rates Houston’s overall retail rental rate at $15.79 per sq. ft. NNN in the third quarter held steadyy from the p q previous quarter, but fell 2.5 percent from one year ago. Key product types posted larger decreases on a year-over-year, led by community centers down 6.4 percent to $17.03 per sq. ft. NNN (from $18.20), and power centers down 4.8 percent to $19.70 per sq. ft. NNN (from $20.69). Strip and neighborhood centers also posted rate decreases to $15.42 per sq. ft. NNN (down 2.0 percent) and at $13.50 per sq. ft. NNN (down 1.7 percent).

Year-to-date gains in occupied space were led by neighborhood centers with positive net absorption of 875,062 sq. ft. In contrast, three key categories recorded d d significant i ifi l losses i occupied in i d space through the third quarter including community centers’ 203,343 sq. ft., single-tenants’ 328,422 sq. ft., and malls’ 160,815 sq. ft., all in negative net absorption.

Leasing Houston’s retail leasing activity reached 1.5 million sq. ft. in the third quarter, the highest quarterly total this year. Weak activity in the first half of 2009 kept the year-to-date total of 3.7 million sq. ft. significantly below the 5.1 million sq. ft. recorded through the third quarter last year, as tenants and consumers struggle through a sluggish economy marred by negative job growth. See the column at left for a select list of 2009 retail leases. COLLIERS INTERNATIONAL

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Houston Retail Year-to-date 2009 Investment Sales Total volume $212.3 million # of properties:

297

Total Sq. Ft.: 4,369,053

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Sales Activity Retail sales activity remained weak in the Houston area as the ongoing credit crunch continues to limit the pool of potential investors in the market. Year-to-date through the third quarter, 297 retail properties with a combined 4.4 million square feet have been sold for a total dollar volume of $212.3 million and an average $136 per square foot. As the select list of recent retail sales below indicates, transaction activity continues to be dominated by smaller properties with less than 50,000 square feet, while private investors comprise the majority of active investors in the Houston market.

Price/Sq. Ft.: $136 Average Cap: 8.5%

SELECT HOUSTON RETAIL Source: Costar Comps SALES YEAR-TO-DATE 2009

PROPERTY / ADDRESS

SQ. FT. YOC/REN

BUYER / SELLER

SALES PRICE / $ PER SQ.FT.

Village Shops at Westheimer 12280 Westheimer Mount Houston Square 11703-11743 US Highway 59 2 Property Sale Old Katy Rd 7065 Old Katy Road Center at Grand Lakes S. Peek Road & Fry Road Walgreens Pharmacy 8505 FM 1960 West y CVS Pharmacy 8754 Spring Cypress Former Tuscan Garden Oaks 835 34th Street Retail Bank Bldg. 24250 Cinco Ranch Boulevard Corners Shopping Center 5425 Highway 6 Retail Storefront (Spring) 5503 FM 2920 Retail Strip Center 4420-4440 W. Orem Drive

45,372 1984 173,080 1974/1996 34,000 2,004 24,552 2005 12,749 2003 13,013 2005 33,250 2009 18,612 n/a 39,851 1996 24,415 1996 32,507 1962

MHK Realty of Texas Silver Crest Properties p Component Capital Group Centro Properties Group Robert Orkin Interests McKenzie Galleries & Commercial MPI of Grand Lakes, Inc. YHR Partners I Cole Capital Partners UBS Real Estate Investments Spring p g TX Venture, LLC Gulf Coast Commercial Group Kempner Capital Management, Inc. Thompson & Knight, LLP Stafford Properties Development Co. The Ainbinder Company LBUBS 2004-C8 Retail Corners, LLC Hunt Partners Retail Group, LLC Chas Schulz g Donald & Bernadette Sanberg Jind Interests, LLC Jatinder S. Sabharwal

$6.7 MIL $147 $9.7 MIL $56 $3.0 MIL $88 $5.3 MIL $215 $5.1 MIL $403 $3.8 MIL $290 $3.3 MIL $98 $3.1 MIL $167 $2.1 MIL $53 $2.1 MIL $86 $1.8 MIL $54

SUBMARKET/OCCUPANCY SALE DATE Westheimer - 87% September p 2009 Homestead - 100% July 2009 The Heights - 100% June 2009 South Katy - 93.5% June 2009 West Kingwood - 100% March 2009 Willowbrook - 100% June 2009 Northwest - 100% June 2009 South Katy - 100% March 2009 Stafford-Missouri - 31.1% June 2009 Spring - 100% May y 2009 Stafford-Missouri - 100% January 2009

HOUSTON RETAIL MARKET SUMMARY

Rentable Area

Strip Centers

Direct Vacant SF

Direct Vacancy Rate

Sublet Vacant SF

Sublet Vacancy Rate

Total Vacant SF

Total Vacancy Rate

3rd Qtr Net Absorption p

Year-to-Date Net Absorption p

37,459,464

5,240,538

14.0%

46,041

0.1%

5,286,579

14.1%

21,859

Neighborhood Centers

59,607,205

7,275,734

12.2%

229,363

0.4%

7,505,097

12.6%

318,033

875,062

$13.50

Community Centers

30,087,215

4,009,627

13.3%

140,778

0.5%

4,150,405

13.8%

151,186

(203,343)

$17.03

Power Centers

17,836,231

1,163,706

6.5%

137,461

0.8%

1,301,167

7.3%

191,800

184,666

$19.70

3,360,613

273,978

8.2%

1,458

0.0%

275,436

8.2%

(10,323)

50,106

$23.41

Lifestyle Centers

200,320

Weighted Avg. Rental Rate NNN

$15.42

Outlet Centers

1,533,424

32,954

2.1%

-

0.0%

32,954

2.1%

(3,400)

(10,554)

$9.28

Theme/Entertainment

2,268,271

351,221

15.5%

-

0.0%

351,221

15.5%

(1,694)

22,337

$48.65

Single-Tenant

44,287,918

2,085,108

4.7%

53,207

0.1%

2,138,315

4.8%

(62,730)

(328,422)

$12.94

Malls

23,620,346

1,564,853

6.6%

92,047

0.4%

1,656,900

7.0%

(156,766)

(160,815)

$14.56

21,997,719

10.0%

700,355

0.3%

22,698,074

10.3%

447,965

629,357

$15.63

Greater Houston Retail

220,060,687

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Development Activity – Select Projects Delivered YTD 2009 and Under Construction CityCentre, bldgs. 1-2, 13 (left) 800 Town & Country Village 270,899 Sq. Ft. - 87.7% Leased Est. Delivery: December 2009 Developer: Midway Company BlvdPlace (right) 3 & 4 Boulevard Place 205,000 Sq. Ft. - 3.0% Leased Est. Delivery: 2010-2011 Developer: Wulfe & Company

River Oaks Shopping Center 2030 West Gray Street 61,172 Sq. Ft. - 60.7% Leased Delivered: August 2009 D l Developer: W Weingarten i Realty R l

Victory Lakes Town Center 2620-2850 Gulf Freeway 170,252 Sq. Ft. - 62.6% Leased Delivered: February 2009 Developer: NewQuest Properties

Kirby Commons 7929 Kirby Drive 38,156 Sq. Ft. - 52.4% Leased Delivered: June 2009 D l Developer: Si Simmons Vedder V dd

Waterside MarketPlace Grand Parkway at Mason Road 147,917 Sq. Ft. - 97.6% Leased Delivered: May 2009 Developer: Regency Centers COLLIERS INTERNATIONAL

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HOUSTON RETAIL PROJECTS UNDER CONSTRUCTION Submarket Memorial East Galleria River Oaks Rosenberg Cypress Cypress Lake Jackson Washington Boulevard g Land Sugar South Katy Baytown Hobby Washington Boulevard Sugar Land Clear Lake Clear Lake Hobby Cypress Spring Stafford-Missouri City North Katy Stafford-Missouri City Rosenberg

Property Name CityCentre, bldgs. 1, 2, 13 Blvd Place West Ave, bldgs. A,C, D1, D2 Kroger's (Brazos Town Center II) Fairway Point, bldgs. A,B,C,D,E Cypress Village Station Brazosport Village Washington Centre Kensington g Commons Best Buy (Shops at Bella Terra) Eastchase Shopping Center 12941 Gulf Freeway Center 3939 Washington Lake Pointe at Sugar Land Laurel Bay Center 161 North Highway 35 Center Cullen Commons II Coles Crossing Shopping Center III Louetta North Retail Center 12615 South Gessner Retail Walgreens (Katy Main Street) The Shoppes at Sienna Plantation Cracker Barrel (Brazos Town Center II)

Address 800 Town and Country Village 3 & 4 Blvd Place Kirby Dr @ Westheimer Rd 24400-24502 Commercial Dr 15103 Mason Rd Skinner Road & Highway 290 410-426 Plantation Dr 4601 Washington Ave 16305 Kensington g Dr Grand Parkway & Westpark Tollwa Eastchase St & Garth Rd 12941 Gulf Fwy 3939 Washington Ave 1611 Hwy 6 FM 2094 @ Lighthouse Blvd 161 North Highway 35 12805 Cullen Blvd Spring Cypress 1614 Louetta Rd 12615 S Gessner Rd 25620 Pin Oak Rd Highway 6 & Sienna Parkway 23801 South West Fwy

Total retail under construction in projects listed above Grand total retail under construction (including projects not listed)

RBA 270,899 205,000 195,835 134,200 80,000 79,550 56,102 47,922 33,800 , 30,067 30,000 24,831 22,800 22,590 22,400 20,466 20,000 19,880 18,000 15,000 14,820 13,115 10,300

% Leased 87.70 2.71 11.60 100 0 100 95.37 47.73 0 100 0 71.81 0 0 70.98 100 42.5 16.93 16.39 100 100 0 100

Developer Name Midway Companies Wulfe & Co. Urban Partners, Inc. NewQuest Fairfield Village Community NewQuest Chainlinks Retail Advisors Washington 4600 Ltd Shah Companies p Moody Rambin Moseley Commercial Real Estate Jacob White Construction Apex Group The Mody Group Ltd. The Retail Connection Off Corner Texas Ltd. Cullen Commons Interra Properties ORR Commercial Seyed Deen Woodcreek Development/BPI Realty Prosperity Investments NewQuest

Estimated Delivery Nov-09 2010-2011 Dec-09 Nov-11 Jan-10 Jun-10 2010 Dec-09 Dec-09 Dec-09 Jan-10 Jan-10 Dec-09 Jan-10 Dec-09 Jan-10 Dec-09 Dec-09 Nov-09 Jun-10 Dec-09 Mar-10 Nov-09

1,387,577 1,440,157

HOUSTON RETAIL DELIVERIES YEAR-TO-DATE 2009

Submarket

Property Name

Address

Clear Lake South Katy Pearland Jersey Village East Kingwood Memorial West Midtown North Katy Pearland Tomball Spring West University Cypress Rosenberg Pearland River Oaks Northwest Pasadena Pearland Tomball Friendswood Tomball La Porte The Woodlands Rosenberg Northwest Memorial West Memorial East Alief Fall Creek Th Woodlands The W dl d North Katy

Victory Lakes Town Center Waterside Marketplace Target (Pearland Parkway Village) LA Fitness West Lake Crossing BP Childcare Center River Oaks Shopping Center Mission at Katy Mills Parks At Boulder Creek Sears Home Appliance (Tomball Marketplace) Sawdust Shopping Center Kirby Commons Cypress Village Station Grand Parkway & Hwy 59 Shadow Creek Centre Greenway Commons Former Tuscan Garden Oaks Deer Park Center Shadow Creek Marketplace p Saddlebrook Plaza Friendswood Park Plaza Tomball Marketplace - Shops F Brittany Plaza Market Street at The Woodlands Goldshire Plaza North Houston Rosslyn Retail 14520 Briar Forest Retail Center CityCentre, bldg. 9 Apple Dentists Park Lakes Landing, bldg. C T h l Technology Pl Plaza att R Research hF Forestt PetSmart (Shops at Bella Terra)

2620-2850 Gulf Freeway S Grand Parkway & Mason Rd 8503 N. Sam Houston Parkway 9246 W. Sam Houston Parkway 7510 W Lake Houston Pkwy 540 Westlake Park Blvd 2030 West Gray Street 25100 Katy Mills Dr 15055 Pearland Pkwy 14512 FM 2920 525 Sawdust Rd 7929 Kirby Dr 25282 Northwest Freeway 19875 59 Hwy 11901 Shadow Creek Pkwy 3830 Richmond Ave 835 34th St 4200 Pasadena Blvd Shadow Creek Pkwyy & Hwyy 2 25201 Kuykendahl 907 S Friendswood Dr 14223 FM 2920 1610 Brittany Bay Blvd 9595 Six Pines Road 0 FM 1640 Rd 8511 N Houston Rosslyn Rd 14520 Briar Forest Drive 800 Town and Country Village 13194 Bellaire Blvd 4801 Wilson Rd 4223 R Research hF Forestt D Dr Grand Parkway & Westpark Tollwa

Total retail projects delivered year-to-date listed above Grand total retail projects delivered year-to-date including those not listed above

RBA 170,252 147,917 133,055 128,033 78,085 74,708 61,152 58 602 58,602 48,400 43,332 40,000 38,156 35,317 35,214 35,000 34,848 33,250 30,074 29,545 28,000 27,000 26,880 24,000 24,000 23,010 22,000 22,000 21,000 20,500 20,102 20 000 20,000 20,000

% Leased Developer 62.58 97.60 92.18 100 100 100 60.70 1 03 1.03 66.94 25.20 100 52.83 100 25.70 48.60 54.70 100 0 0 0 77.41 0 77.10 2.50 100 100 63.40 100 100 83.00 37 00 37.00 100

Built

NewQuest Regency Centers Plaza at Pearland Village Ltd. Hong Du American Investment Atascocita Commons Ltd. Westlake LP Weingarten Realty Option 1 Realty Group JEFCO Development Corp Weingarten Realty DMA MC Investments Simmons Vedder & Company NewQuest KM Realty Advisors First Brazoria Capital Funding Trammell Crow Company Titus, Inc. Smithco Development Gulf Coast Commercial Group p Sumkin Development Crystal Creek Developers Weingarten Realty Wulfe & Co. Kimco Realty Simron Properties LLP Afie & Ben Investments Thybach Builders Midway Companies Elevia Inc. Read King Commercial Th Woodlands The W dl d L Land dD Development l t Moody Rambin

Feb-09 May-09 May-09 Sep-09 Mar-09 Jan-09 Aug-09 Mar-09 Feb-09 Jan-09 Feb-09 Jun-09 Sep-09 Feb-09 Jun-09 Mar-09 Jun-09 Jun-09 Jan-09 Mar-09 Jun-09 Jun-09 Feb-09 Sep-09 Feb-09 Feb-09 Jun-09 Jun-09 Feb-09 Jan-09 J 09 Jun-09 Sep-09

1,728,522 1,920,174

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