Retail Market Overview - 1st Quarter 2009

RETAIL NEWSLETTER [PORTLAND, OR]

[QUARTER ONE 2009] Commitment to Values

RETAIL MARKET OVERVIEW

SUPPLY, VACANCY & ABSORPTION

By Grant Norling Oregon Retail Specialist – 503.542.5416

Retail supply, vacancy and absorption are analyzed using the Norris, Beggs & Simpson Retail Market Report. As of the end of the fourth quarter 2008, the total retail supply in the Portland market was 43,178,907 SF of which 2,521,052 SF was vacant, indicating a vacancy rate of 5.8%, up 90 basis points from 4.9% one year ago. This shows a relatively high vacancy rate from what the Portland market has experienced in the past five years. This increase can be largely attributed to the increase in vacant big box spaces due to bankrupt national and regional retail chains. Currently, the Portland market is experiencing a retail vacancy rate that is slightly above the range typically exhibited by healthy markets of 4 to 5%.

The Portland Metro commercial real estate market is beginning to show signs of an economy adversely impacted by recession. The office, industrial and retail sectors are slipping and can no longer help buoy the economy which has been drug down by the tanking residential market. Without the ability to gaze into a crystal ball to predict the future, it is hard to forecast when the overall real estate market will hit bottom and when it will begin to crawl back out. Don’t expect an inflection point for at least a few more quarters even from the most optimistic perspective. Do expect a vast amount more retailers to call it quits in the The following table details changes in retail supply, coming months as the aftermath of the grim holiday season absorption and year-end vacancy over the past 10 years. is sorted out. Some experts project that over 12,000 stores will go dark across the US by year end. When the dust settles, this Portland Metro Retail Demand recession will hopefully provide the road map to reinvent the Year Absorption (SF) Vacancy retail market in a way to generate sustainable growth. The 2008 holiday shopping season was dismal and left many retailers reeling in the already stagnant economy. The International Council of Shopping Centers (ICSC) which tracks retail sales volume shows that the holiday retail sales fell to a low that hasn’t been touched in over 35 years. The outlook for 2009 is bleak; unemployment has reached a high that hasn’t been seen since 2003, rising to 9.0% in Oregon and will rise higher. In reaction, retailers are slashing prices to entice consumers that have expendable income to shop at their stores. However, these are not a sustainable long-term business practices. With many big box retailers filing for bankruptcy, there is increasing availability of unobstructed spaces available in the marketplace. With the collapse of Wicks, Linens N Things, and Circuit City, it has left an additional 1% vacancy in the local Portland retail market alone. Many of these vacant spaces aren’t the appropriate size to accommodate the few active national retail tenants. A high level of incentives from property owners will be required to attract willing tenants to lease the empty spaces. Likely incentive will either come with high tenant improvement funds or months of concessions or both. However with many national retail tenants taking a conservative growth route and waiting out the uncertainty of the volatile financial markets; it is likely that a majority of these vacancies will endure prolonged vacancy periods.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

506,141 979,766 342,886 375,920 242,709 2,461,489 808,981 46,584 1,100,000 339,774

Total

9,476,332

5.0% 6.0% 6.7% 5.4% 4.3% 4.3% 4.7% 4.8% 4.9% 5.8%

Source: Norris Beggs & Simpson Retail Market Report

The Portland retail market has achieved positive retail absorption each of the past 10 years, which is a positive demand indicator. This trend is projected to abruptly reverse in the coming quarters as the market continues to soften. The Portland market consists of seven general submarkets including: Central City, Sunset Corridor, Southwest, Eastside, 122nd/Gresham, East Clackamas and Vancouver. Five of the seven sub markets achieved positive year-to-date absorption. Particularly strong submarkets include the East Clackamas and Eastside, which have retail vacancy rates of 2.5% and 5.0% respectively. The 122nd/Gresham and Central

PGP VALUATION INC IS PROUD TO PARTNER WITH A WORLDWIDE AFFILIATION OF INDEPENDENTLY OWNED AND OPERATED REAL ESTATE SERVICES. THE POWERFUL PARTNERSHIP WITH CMN ALLOWS PGP VALUATION TO OFFER ITS CLIENTS A VERY BROAD RANGE OF SERVICES AND RESOURCES IN MORE THAN 100 MARKETS AROUND THE WORLD.

Retail Newsletter

Q1 2009

Portland OR

City submarkets cover the high end up the vacancy Since the early 2000s investors have looked for relatively safe spectrum operating at 7.5% and 8.0% vacancy respectively. investment vehicles. With the stock markets slumping and money markets erratic, many investors flocked towards real The following table provides the estimated retail space per estate investing. With property values on the rise it was a safe capita (SF/Capita) for the Portland Metro area compared to bet that any property they bought could be sold for a profit Salem and nationally. in five years. However with the recent softening of the commercial market, the residential market six months prior to Retail Supply/Capita that, and the CMBS market evaporating overnight; it has left Catergory SF/Capita many participants at risk of being upside down in their Portland Metro 28 investments. The previous five years of a bull real estate Salem 41 market peaked and we are now in the midst of a bear National Low 22 market. Investors are being less hasty with their money and National High 74 are searching for the best deals they can find. National Average 44 CAPITALIZATION (CAP) RATES Source: CoStar Property ® Portland ranks as the third lowest retail supply per capita according to CoStar. This positions Portland well to bear tough economic times and is evidence that the Portland market is not overbuilt with retail like many major US markets. Presently, it is easier to appreciate the insolating impact that the UGB and stringent zoning have on the region, rather than focus on the obstacles they present to sustained growth. .

COMMERCIAL & RETAIL SALES Nationally commercial property sales decreased by almost two-thirds; dropping from $450 billion in 2007 to below $150 billion in 2008 according to Real Capital Analytics.1 Furthermore their data reveals that retail sector sales volume dropped from $75 billion in 2007 to just over $20 billion at the close of 2008. Looking forward to 2009; the market shouldn’t be much different. A close look at the Portland market retail sales volume for 2008 reveals it’s nearly half of what it was at the close of 2007. The chart below summarizes some of the sales from 2008 and breaks them down into three categories; Anchored, Strip and Other (triple net, fast food, freestanding, etc).

2008 Investment Retail Sales - Oregon Category Size Low High Average Sale Price Low High Average Sale Price/SF Low High Average Cap Rates Low High Average

1

.

Retail CAP Rates - OR Year

Type of Center

CAP Rate Range

Average CAP Rate

2002

Strip Anchored All Centers

8.3 - 10.8% 7.9 - 9.5% 7.9 - 10.8%

9.6% 8.9% 9.2%

2003

Strip Anchored All Centers

8.0 - 9.6% 7.0 - 9.5% 7.9 - 9.6%

8.8% 8.7% 8.7%

2004

Strip Anchored All Centers

6.5 - 8.9% 7.0 - 9.4% 6.5 - 9.4%

7.6% 7.6% 7.6%

2005

Strip Anchored All Centers

6.4 - 7.8% 5.9 - 8.6% 5.9 - 8.6%

7.1% 7.2% 7.1%

Anchored

Strip

Other*

40,800 78,292 53,306

12,000 27,710 16,465

1,690 14,820 5,264

$6,925,000 $16,762,867 $12,165,717

$1,575,000 $6,200,000 $4,018,250

$625,000 $7,300,000 $2,607,479

2006

Strip Anchored All Centers

5.5 - 10.1% 5.7 - 7.7% 5.5 - 10.1%

6.9% 6.7% 6.8%

$170 $322 $226

$131 $347 $248

$191 $835 $528

2007

Strip Anchored All Centers

5.8 - 8.1% 6.2 - 7.3% 5.8 - 8.1%

6.8% 6.7% 6.8%

6.5% 7.6% 7.0%

6.5% 7.0% 6.7%

6.0% 8.5% 7.2%

2008

Strip Anchored All Centers

6.5 - 7.0% 6.5 - 7.6% 6.5 - 7.6%

6.7% 7.0% 6.9%

Source: PGP Valuation, Inc. Database *Fast food, freestanding & NNN

2

The following table shows historical CAP rate trends in Oregon for the past several years. The average CAP rate for all centers rose from 6.8% during 2007 to 6.9% in 2008; a nominal change; however, a telling sign of the times to come. Increased vacancies will likely push CAP rates higher in the coming year as investors take a more conservative approach for non-stabilized properties and are faced with higher costs for loan dollars, which will require reduced prices to maintain modest cash-on-cash returns.

Real Capit al Analytics – Capital Tends Monthly – 2008 (www.rcanalytics.com)

Source: PGP Valuation, Inc. Database

Retail Newsletter

Q1 2009

CAP rates in Oregon trended downward for several years; however, they stabilized (2006-07) and have trended upward slightly in the past year due to the credit crisis and increased investment risk in today’s economy. Interviews with sales brokers familiar with both local and national real estate investments indicate that CAP rates and corresponding values within the Pacific NW region are holding strong relative to other regions. However, this might be a lag effect similar to the one seen in our housing markets. Several factors contribute to the relatively strong commercial real estate fundamentals in the Pacific NW region: (1) stringent zoning and scarcity of developable commercial sites create a barrier to entry for new development; (2) stable supply/demand conditions (vacancy levels) insolate existing development and ensure that market rent levels at minimum match inflation; (3) very few prime investment properties are available for sale, while demand from local, regional and national investors is still relatively strong in this marketplace; and (4) the relationship between NOI and value (CAP rates) have remained in balance relative to other regions. Even the best markets with the most ideal fundamentals are primed for correction in a slumping global economy.

UNEMPLOYMENT, WHEN WILL IT PEAK? Unemployment is on its way up as recession breeds job losses. Oregon has the 6th highest unemployment rate in the US as of December. The national average is at 7.2% and Oregon is almost two hundred basis points higher at 9.0%. Some of our neighbors have slightly higher unemployment, with Nevada at 9.1% and California at 9.3%. Expect unemployment to rise with the number of retailers and major employers downsizing or declaring bankruptcy. President Obama is working towards an economic stimulus program to help combat the high unemployment; however, it could take several months before any relief is created by this program. Some economist are doubtful of the long-term benefits than can be provided by any stimulus package. Below is a graph that charts unemployment in Oregon and in the United States as it has been on the rise in the past year.

Portland OR

THE BIGGEST LOSERS OF 2008 Banks are getting a handout from the government for every bad investment decision they made and retailers are being left to bare the burden of a sour economy. It’s inevitable for the strongest retailers to survive and those who were too aggressive with their business model being forced into bankruptcy court to settle their now troubled assets; causing tens of thousands of jobs to be lost in the mean time. Here is a list of the biggest losers in the retail world.

Losers of 2008 Walgreens Walmart Lowes JC Penny Best Buy Winco

Circuit City Linens 'N Things Wicks Macys KB Toys Mervyns

Wilson Leather Sharper Image Levitz Gottschalks Wilson Leather Blockbuster

McDonalds

Shoe Pavillion

Hollywood Video

Many retailers may have had a slow year, but some should count their blessings as they hold on. Those who have announced major bankruptcies or store closings are summarized in the following table with the number of store closings nationally listed on the right.

Retailer

Status

9%

Ann Taylor Banana Republic Circuit City Disney Stores Foot Locker Linens 'N Things Macy's Mervyn's Pacific Sunware Phillips-Van Heusen Sharper Image Starbucks Wilson's Leather Zales Jewelers

Re-Structuring Re-Structuring Chapter 11 Chapter 11 Re-Structuring Chapter 11 Re-Structuring Chapter 7 Re-Structuring Re-Structuring Chapter 11 Re-Structuring Chapter 11 Re-Structuring

8%

Forecasting

7%

The Rivers at Oregon City is a proposed 64 acre shopping center to be constructed at the intersection of I-205 and Hwy 213. It will sit adjacent to Home Depot and will be anchored by a Target and a Regal Cinema. Sub-anchors include Best Buy, Staples, Bed Bath & Beyond, and Dicks Sporting Goods. Total retail building square feet is projected to come to have over 706,000 SF

Unemployment 2008 Oregon

United States

10%

6% 5% 4% January

April

July

October

Stores Closed 117 25 721 98 60 371 11 149 154 175 96 600 103 105

3

Retail Newsletter

Q1 2009

Portland OR

THE DOWNFALL OF THE BIG BOX? PGP VALUATION INC IS A REAL ESTATE APPRAISAL CONSULTING FIRM. ESTABLISHED IN 1978 IN PORTLAND, OREGON, AND HAS GROWN TO BECOME ONE OF THE LARGEST COMMERCIAL VALUATION FIRMS IN THE COUNTRY.

PGP VALUATION INC IS PROUD TO PARTNER WITH COLLIERS INTERNATIONAL, A WORLDWIDE AFFILIATION OF INDEPENDENTLY OWNED AND OPERATED REAL ESTATE SERVICES. COLLIERS WAS AMONG THE FIRST COMMERCIAL REAL ESTATE ORGANIZATIONS TO RECOGNIZE THE IMPORTANCE OF LOCAL KNOWLEDGE ON A GLOBAL SCALE, AND TO PROVIDE CONSISTENT, SUPERIOR SERVICE IN MULTIPLE LOCATIONS.

THE POWERFUL PARTNERSHIP WITH COLLIERS ALLOWS PGP VALUATION TO OFFER ITS CLIENTS A VERY BROAD RANGE OF SERVICES AND RESOURCES IN MORE THAN 100 MARKETS AROUND THE WORLD. FOUNDED IN 1978 BY THREE OF THE BIGGEST NAMES IN THE BUSINESS, DAVE PIETKA, DON PALMER, AND DAVE GROTH, PGP VALUATION HAS GROWN TO BECOME AN INTERNATIONAL FIRM WITH 250 ASSOCIATES IN THREE COUNTRIES. OFFICES LOCATED IN: UNITED STATES BOISE, BOSTON, CARLSBAD, CHICAGO, COLUMBUS, DALLAS, DENVER, HONOLULU, IRVINE, LOS ANGELES, PORTLAND, PHOENIX, ROSEVILLE, SAN DIEGO, SAN FRANCISCO & SEATTLE CANADA CALGARY, EDMONTON, HALIFAX, TORONTO, VANCOUVER GRANT NORLING HAS BEEN SERVING THE OREGON MARKET OVER THE PAST EIGHT YEARS AT PGP VALUATION AND HAS DEVELOPED A SPECIALTY TEAM FOR PROPERTIES INCLUDING SINGLE-TENANT TRIPLE NET, STRIP, NEIGHBORHOOD, COMMUNITY AND SUB-REGIONAL CENTERS. HIS TEAM ALSO WORKS ON A VARIETY OF OTHER PROPERTY TYPES INCLUDING: DENTAL CLINICS, MEDICAL OFFICES, MIXED-USE CENTERS, SELF-STORAGE, MOBILE HOME PARKS AND HOTELS/MOTELS. CONTACT HIM BY PHONE OR EMAIL LISTED BELOW.

APPRAISING

RETAIL

W. GRANT NORLING MANAGING DIRECTOR - PORTLAND RETAIL 503.542.5416 [email protected]

Linens N’ Things and Circuit City will soon account for over 1000 stores across the United States to go dark and are pushing vacancy rates up. In addition, numerous retailers are slowing expansions due to consumers cutting back on spending and demand for these big boxes is diminishing. These spaces are large; from 35,000 SF to over 100,000 SF; with lot sizes typically above three acres. Below is a rundown of the recent big box spaces in the Portland Metro market that have gone dark and remain vacant. These vacancies represent roughly 1% of the total 42 million SF of space in the Portland Metro market area.

Vacant Box Spaces Former Tenant Mervyns

Vancouver

82,225

Portland Portland

40,160 35,000

Linens N' Things Linens N' Things Levitz

Beaverton Tanasbourne Clackamas

45,000 38,410 34,103

Levitz Wickes

Tigard Jantzen Beach

40,041 51,350

Shoe Pavilion Shoe Pavilion

Portland Jantzen Beach

17,505 19,909

Shoe Pavilion

Beaverton

16,500

Total

Circuit City lost its battle with the recession and was forced into chapter 11 even after the initial closing of 155 poorly performing stores across the Midwest. With a lackluster showing of buyers to purchase existing leases and bleeding capital at the seams; no other choices were left but to close the remaining 567 stores and liquidate all assets. Circuit City is planning on having all of its stores liquidated by the end of March which leaves four stores in Portland and one store in Salem going dark before the start of the second quarter. The following chart breaks down each of these buildings and vacant square footage that they will leave for in the market.

Vacant Box Spaces Former Tenant

Location

Sq. Ft.

Circuit City

Gateway

37,857

Circuit City

Jantzen Beach

Circuit City

Washington Square

±37,000

Circuit City

Clackamas

±37,000

Circuit City

Salem

±37,000

Total Source: CoStar®

.

Real________________________________ Capit al Analytics – Capital Tends Monthly – 2008 (www.rcanalytics.com)

420,203

Source: New & Neville Real Estate Services

PGP VALUATION INC

1

Sq. Ft.

Linens N' Things Linens N' Things

110 SW YAMHILL STREET, SUITE 200 PORTLAND OREGON 97204-3024 WWW.PGPINC .COM

4

City

37,360

186,217