INVESTMENT PROPERTIES DIGEST

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1 [FOURTH QUARTER 2017] GREATER WASHINGTON, DC BALTIMORE REGION 2017 Market Review / 2018 Forecast Transactions Volume Down Cap Rates Up The retail sector is facing extreme head winds resulting in profound changes shaped by changing demographics, consumer expectations and omni channel retailing. While Amazon and its e-commerce rivals vie for ever-larger market shares RadioShack, The Limited, Payless, hhgregg and Toys R Us have gone bankrupt. In 2017, more than 5,000 stores have gone dark nationwide; Payless closed 900 stores, Sears/Kmart shuttered 358 stores, JC Penney locked doors of 138 stores. You get the picture. Even triple A credit worthy stores like Walgreens closed stores and cut short new store development. CVS s new store program is on hold. Some estimate more than 3,600 stores will close in INVESTMENT PROPERTIES DIGEST H&R Retail s Investment Properties, led by Michael Gorsage and Kate Howarth, is pleased to present the Fourth Quarter of 2017 edition of the Digest. The Digest is an edited collection of articles that we gather from various publications. We hope you find the information useful. By 2022, according to an analysis by Credit Suisse, one of every four U.S. regional malls may close. Of the 33 regional malls in Baltimore Washington MSA a third have either vanished (Landover and White Flint), lost one or more of their department store anchors (Dulles Town Center) or are currently being reconfigured into mixed use town centers like Lakeforest and Landmark. Large format boxes with a few exceptions are at risk and present serious financial challenges for Landlords. The cost to sub-divide and release is expensive and may take months or years. There is substantial risk in boxes either not renewing leases, downsizing or requiring rent reductions. We are witnessing box activity that mimics a recession, not a growing economy. Deals are being struck with retailers like Hobby Lobby and Gabe s, who normally need a down market to expand. In the past expectation was that there would be 2 retailers per category. Now, it is fortunate if there is one. Retailers with huge appetites 10 years ago are on hold. However, the retail apocalypse is not universal. Retail is not dead! As stated earlier it is changing. Overall, the sector is still growing at a healthy rate of 3% a year. Growth is still good in grocery, movie theaters, restaurants and gyms. Retail s biggest disruptor isn t e-commerce it is demographics. The shift in retail has been especially hard on the suburbs and rural areas. Centers with densely populated trade areas, including ethnic areas, trade at more aggressive cap rates than plain vanilla suburban strip centers. Urban mixed-use developments, ideally with a residential component and strong employment growth, are especially attractive to tenants and investors. Successful retailers like Burlington, Best Buy, Dicks and TJX are all looking to downsize their current footprints and growth is much slower. Home improvement and auto supply should perform better than other segments. Grocery stores, specifically those with a clear identity like Giant, Trader Joe s, Aldi and Whole Foods, are still at the top of investors investment criteria. Amazon s acquisition of Whole Foods earlier this year sent a shiver through the grocery business and caused some investors whose acquisition criteria was centered on top tier grocery anchored centers to re-think their strategy. The middle of the road grocery store like Food Lion, or Shoppers Food Warehouse are being squeezed on all sides by alternative format retailers like the drug stores, dollar stores and other grocery competitors. Ready to wear and other soft goods retailers will need to locate in densely populated urban areas in order to survive. One should not assume retailers will exercise their options if the rent is above market. The big story is the significant decline in the number of transactions. We track all multi-tenant retail transactions above $10 million in the Baltimore Washington MSA. Typically, 30 or more centers are sold annually. In 2017 only 19 transactions above $10 million traded. Only two of those transaction were in Baltimore. There is a similar page 1

2 decline in other markets. Institutional investors still have a strong appetite, cap rates continue to be at record lows but only for the best of the best. Assets that do not check all the boxes are not considered on a risk adjusted basis. They are simply dropped. We expect REITs to be net sellers in Debt is still plentiful and interest rates continue to be low however as the economy improves interest rates may rise precipitating an increase in cap rates. Yield requirements may also increase due to a booming stock market and the new tax law. The cap rate gap between prime Class A and Non-Prime Class B assets could continue to grow. Cap rates have increased at least 20 bps over last year and we would argue that the Class B cap rates have increased more. Investors should not count on appreciation or much rent growth over the coming months. To illustrate that investors prefer assets in higher density locations we have included a map (page 5) showing in red multi-tenant center sales above $10 million that close below 7% cap. We expect this trend to continue. If you have any questions or would like more information please do not hesitate to call us. Klein Enterprises Buys Shopping Center in Northeast Maryland for $11.6 Million Klein Enterprises has acquired North East Station Shopping Center, an 87,006-square-foot retail center in North East, a town in northeast Maryland situated between Baltimore and Philadelphia, for $11.6 million. The seller was not disclosed. Food Lion anchors the center, which was 90.3 percent leased at the time of sale to tenants including Walgreens, Waffle House, AutoZone, Wendy s and West Marine. North East Station is less than a mile from the Principio Industrial Park, which will house the new Amazon distribution center and its 700 full-time employees. The Shoppes at Bowie Town Center has Sold for $21 Million to a New York-based Family Trust A New York-based family trust has paid $21 million for the 104,000 square foot Shoppes at Bowie Town. The buyer, J.A.R. New York RLT, owns a variety of retail centers in the New York area and is expanding into other markets. Shoppes at Bowie Town Center LLC, the Baltimore-based firm that sold the property, developed it in 2004 and moved to shed the real estate in order to reinvest the proceeds into other projects. The stabilized retail center is located in a dense market near landmarks such as Six Flags America and Joint Base Andrews. The center is nearly fully leased to a range of tenants including Five Below, Party City and A.C. Moore. The center is an extension of the larger, 578,000-square-foot Bowie Town Center. Saul Sells District Heights Shopping Center The Great Eastern Plaza shopping center located at 6333 Marlboro Pike & Regency Parkway, District Heights, Prince Georges County, MD has been sold by Saul Centers. Bethesda-based Saul sold the approximately 250,000 sf center to Saint Paul Baptist Church, Inc based in Landover, MD, for $8.850 million. St. Paul got two parcels in the deal, including the larger 24-acre tract improved with the center, and an unimproved eight-acre parcel. Saint Paul Baptist Church and Pep Boys are the only significant tenants. Fortress Investment is the New Owner of Two Safeway Stores in Anne Arundel County As CF Albert Propco LLC, the New York-based firm bought both 540 Benfield Road in Severna Park and 1451 Ritchie Highway, in Arnold. The two deals are almost identical twins. In Severna Park, Fortress paid $14.07 million for a 46,896 square foot store in the Benfield Shopping Center. Then it paid $14.9 million for the 44,680 foot store in Arnold. Both deals closed in October and were financed by the Royal Bank of Canada. Fairfax Plaza Expansion An affiliate of Retail Properties of America submitted a nomination to grow the Fairfax Plaza Shopping Center as a residential/mixed-use community with 626 multifamily units, office and retail across 12.6 acres at 2936, 2950, 2960 Gallows Road. County officials refer to this project as the second phase of the Mosaic District, Suchicital said. The property owner for Fairfax Plaza wants to capitalize on the fact that Mosaic District is very successful and asked for an increase in the allowed plan, he said. They just want more square footage. The shopping center would include more than 1 million square feet of mixed-use under the proposal. Doctor Picks Up Watergate Retail Space for $15.4 Million A retired Northern Virginia doctor has picked up the ground lease for the Watergate Shops. The three story retail space totals 57,000 sf and a 135-space parking page 2

3 garage in the waterfront complex for $15.4 million. The buyer is listed as Watergate Partners LLC in the DC Recorder of Deeds. The retail space includes a CVS, nail salon, deli, barbershop, frame shop, pastry shop and restaurants Campono and Zeitoun. A child care center is expected to open soon in a vacant space at the Watergate Shops, according to the report. The space is about 85% leased. Buyer, Tenant for Former Sports Authority Store A Baltimore developer has a tenant in tow to backfill the former Sports Authority store in Bowie. But David Bramble of MCB Real Estate isn t ready to disclose the name of the tenant yet for 4520 Mitchellville Road. MCB, as MCB-Eagle Bowie LLC, paid $3.135 million for the store that once housed the world of sporting goods. Located in the Bowie Gateway Center off Route 301 near Route 50, the store amounts to 42,954 sf. It s lined up between Target on one side and Haverty s on the other in a row of big name retailers. MCB s Bramble said the store traded in good condition and only needs fit-out work for the next tenant. The partnership financed the acquisition with a $4.7 million loan from M&T Bank. CVS Added to Clarksburg Retail Line-Up Joined now by CVS, a long-planned retail center in Clarksburg could be pushing dirt next spring. Affiliates of Gosnell Development have approvals for about 90,000 sf for retail and a hotel on the north side of Route 121, on opposite sides of Gosnell Farm Drive. Across 121 is the game-changing retail center called the Clarksburg Premium Outlets. With a recent application for a site plan amendment, Gosnell, as SMTM Cabin Branch, show a CVS in place of a former bank location. Next to the CVS, on the east side of Gosnell Farm Drive, will be a Hampton Inn, a rebranding of the planned hotel that was originally expected as a Hilton Garden Inn. Gosnell also has phased out a restaurant, as the Outlets have fulfilled that need. On the west side, the Gosnell partnership has master leased the ground to Petroleum Marketing Group, which anticipates a gas station and a quick mart, plus a beer & wine store and a Starbucks outlet. Clarksville Retail Passes Muster Security Development literally went back to the drawing board for River Hill Square, after a first trip to the county s Design Advisory Panel (DAP). River Hill is the proposed retail expansion of the long-time River Hill Garden Center along Route 108 near Sheppard Lane. The garden center s owner has long sought to add retail to bolster its seasonal garden business, and teamed up with Security to make it happen. For its second trip to the DAP, Security changed the architecture completely this time setting an agrarian tone and pushed the buildings closer to Route 108, reducing the parking in front. It was a pair of improvements that helped win the DAP s backing. (The DAP is an advisory board, not one with the power of approval or denial). Security envisions a main building of about 20,000 feet that would house the garden center and post office, plus several inline retailers, then a second building of 12,890 feet for retail and restaurant users. At either end are two more retail buildings, of 4,200 and 2,020 feet. River Hill Square is one of several new retail projects in Clarksville. Clarksville Commons, the redevelopment of a former school in the middle of town, is delivered and tenanting up. At the southern end of Clarksville, at Ten Oaks Road, a new CVS, Mr. Tire and Chick-fil-A are in the works. JCR Buys Shopping Center in Northern Virginia from EDENS for $31 million The JCR Cos. has acquired the Center at Innovation, a 101,990-sf center in Manassas, VA for $31 million. The center is located on Nokesville Road, just west of the interchange with Prince William Parkway. The seller was EDENS. Target shadow-anchors the center, which was more than 90 percent leased at the time of sale to tenants including T.J. Maxx, PetSmart, Chick-fil-A, Tropical Smoothie Café, GameStop, Verizon Wireless and Red Robin. JCR plans to sell the three pad sites that are currently leased to Chick-fil-A, SunTrust Bank and Red Robin, and to fully lease the inline space. Constructed in 2008, Center at Innovation includes five buildings and 482 parking spaces. The property marks JCR s second shopping center acquisition in Manassas. JBG Sells Two Retail Projects In Montgomery County, JBG Smith sold two retail hubs as 2017 closed out, selling stores at Upper Rock and at 275 N. Washington Street. Upper Rock is part of the changing face of Shady Grove Road near Choke Cherry Road, where obsolete office spaces are giving way to mixed uses. JBG put this particular change in motion by consigning an aging page 3

4 building to the Great Beyond and replacing it with 34,700 sf of retail. It has now sold the retail for $16.2 million to a partnership headed by New York-based Zurich Alternative Asset Management. One of the buildings is a CVS of 14,600 sf, while another is home to Cava and Firehouse Subs. Those two addresses are 20 and 28 Upper Rock Circle in Rockville. MOM s Organic Market will occupy the third building, where the 16,000 sf of grocery space is still in fit-out mode. JBG Smith s other retail sale went through in downtown Rockville, as the firm passed 275 N. Washington Street on to a Florida-based buyer called CCN Rock LLC. 275 N. Washington stayed longer on JBG s books the Upper Rock buildings, but it ultimately passed the Bank of America-anchored center, totaling 24,800 sf, on to CCN for $16.4 million. A school called Fusion and several restaurants are among the retail tenants. INVESTMENT OPPORTUNITIES FOR SALE OLD BRANCH PLAZA CLINTON, MARYLAND SHADY GROVE CENTER GAITHERSBURG, MARYLAND SIZE 29,027 SF SIZE 106,924 SF TENANTS Planet Fitness, Hip Hop Fish & Chicken TENANTS 7-11, The Melting Pot FOR MORE INFORMATION PLEASE CONTACT MICHAEL GORSAGE (office) (cell) mgorsage@hrretail.com KATE HOWARTH (office) (cell) khowarth@hrretail.com H&R RETAIL Wisconsin Avenue, Suite 600 Bethesda, MD page 4

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