Retail Report Sacramento Retail Insights Volume 2 2nd Quarter 2012 Accelerating success.
Retail Report 2nd quarter 2012 Sacramento Retail Market Q2 Highlights Overall performance during 2nd Quarter 2012 in the Sacramento retail market (all types) was steady, consistent with a slow recovery. The following is a summary of the market during the quarter. During 2nd Quarter 2012 the overall vacancy rate slightly increased by 10 basis points to 13.4%, after experiencing four consecutive quarterly declines. Total leasing activity remained steady with over 512,700 SF of available space being occupied during the quarter, yielding 75,715 SF of negative net absorption from April through June. Note that most of that negative absorption is attributed to the closing of a 62,00 SF SaveMart center in Elk Grove. Good opportunities continue to exist for Class B and C tenants, as some landlords still need to be aggressive in chasing quality lessees, however, concessions are not as aggressive as they have been in the past 12-18 months. The recovery in the retail sector continues to move forward, albeit with some caution over the current economic climate. The pace of sales activity during the quarter increased by almost 15%, but average pricing of consummated deals during the quarter declined more than 22% from the 1st Quarter average. Lease rates continue to flutter, and will continue to favor tenants until stable employment sources are identified in the region, and the area s economic climate improves. We see lease rates remaining stable over the next quarter, with absorption and vacancy once again recording positive momentum. There are positive signs to the Sacramento real estate landscape. Overall activity is steady. Regional housing is showing signs of life. Good employment news regarding healthcare, new tenants in the market, and Aerojet s business growth. We have a long way to go, but are optimistic about the future. Randy Dixon Managing Director Key Retail metrics - 2Q 2012 (See note Below) Total Market Adjusted Vacancy 13.4% 13.8% Net Absorption (75,715) SF (44,243) SF Deliveries 8,000 SF 8,000 SF Construction 93,371 SF 93,371 SF Average Direct Asking Rate NNN/Mo $1.46/SF $1.46/SF Note: Statistics in the Total Market column include all space in shopping centers/regional malls in the Sacramento MSA. Statistics in the Adjusted column do not include owner-occupied or government buildings. Third Quarter Forecast Vacancy Asking Rates Net Absorption Deliveries Construction 13.3% Down 0.1% From 2Q 2012 $1.70 No Change From 2Q 2012 150,000 Square feet vs. (75,715) SF 2Q 2012 93,300 Square feet vs. 8,000 SF 2Q 2012 0 Square feet Vs 93,371 SF 2Q 2012 p. 2 Colliers International
Retail Report 2nd Quarter 2012 Vacancy The overall retail vacancy rate in Sacramento increased slightly during 2nd Quarter 2012 by 10 basis points to end the three month period at 13.4%. This increase, coupled with the four-consecutive-quarter decline that just ended, is evidence that the recovery in Sacramento s retail sector is going to be bumpy, and slow. User requirements in Sacramento s retail sector will always be correlated to the economic health of the local population base, since retail is a very consumer driven sector. The best measure of resident economic health is the local employment base; do the residents have jobs? Unfortunately, Sacramento s employment continues to struggle, as there remains only a few sources identified for future employment growth. The graphic below illustrates the relationship that has existed between retail vacancy and local employment over the past three years. Retail discounters and small grocery stores continue to absorb some of the vacant retail space available in the market. Both user types are signing deals at great rates. Additionally, national franchise restaurants have been very active in absorbing all of the areas second generation restaurant vacancies. It is also important to note that premium power center locations continue to perform well, but the inventory from those spaces makes up only a small portion of the total 12.3 million sf of power center facilities located in the region. We believe in general that local retailers will continue to hold steady and that activity in Sacramento s retail sector will continue to grow over the next year. We expect modest improvement in retail vacancy over the next quarter, a 10 basis point decline during the three-month period, but are anticipating a 40 basis point reduction by June 30, 2013, ending the 12-month period at 13.0%. Vacancy in community neighborhood space experienced the best performance during 2nd Quarter 2012, remaining unchanged from the 1st Quarter rate of 13.1%, while both power- and strip-center inventory recorded vacancy rates 40 and 50 basis points higher, respectively, than their 1st Quarter 2012 level. In fact, both sectors have experienced a 70 basis point increase in vacancy thus far in 2012. Recent announcements of store closings from big box users such as Fashion Bug, and the continued trend of store downsizing by these larger users, are creating the pressure that is moving vacancy up in the Power Center sector. Employment in Thousands Key Vacancy Metrics - 2Q 2012 Current Quarter (Q2 2012) 13.4% Current Year (Q2 2012) 13.4% Previous Quarter (Q1 2012) 13.3% Previous Year (Q2 2011) 13.7% 850 840 830 820 810 800 790 780 770 Total Inventory Breakdown Community Neighborhood Metro Employment vs. Retail Vacancy # Employed Vacancy Sources: Bureau of Labor Statisics & CoStar 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 60.6% Community Neighborhood 59 Million SF Vacancy Comparison 20.9% Power Center 4.0% 14.5% Power Center Specialty Strip Center Forecast Period Strip Center 14.6% 14.4% 14.2% 14.0% 13.8% 13.6% 13.4% 13.2% 13.0% 12.8% Colliers International p. 3
Retail Report 2nd quarter 2012 Absorption Analysis The 75,715 square feet of negative net absorption experienced in Sacramento s retail market during 2nd Quarter 2012 ends the eight consecutive quarters of positive leasing activity that resulted in over 1.1 million square feet of positive net absorption since mid-2010. This consistent performance is a strong indicator that Sacramento s retail sector is in recovery mode, while the more recent performance is a reminder that the recovery won t be smooth. The negative absorption performance recorded during the quarter is equally attributable to weak leasing activity in both the power center and strip center sectors, with both sectors recording negative net absorption totals of approximately 45,000 square feet. Market performance during 1st Quarter 2012 of the various submarkets comprising the Sacramento retail base can best be characterized by stable inventories, vacancies that experienced Net Absorption Square Feet 400,000 300,000 200,000 (100,000) (200,000) (300,000) small swings up and down, and absorption levels both on the positive and negative side with no dramatic gains or losses. With only few exceptions, the performance across the various submarkets clearly supports the Sacramento retail market being in its recovery phase. The following summary shows 50% more negative leasing activity than positive. There were certain notable performances within the submarkets (across all sub-sectors) during 2nd Quarter 2012 and are summarized in the tables below. 100,000 0 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 Sources: CoStar & Colliers Research 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 Forecast Period 3Q 4Q 1Q 2012F 2012F 2013F 2Q 2013F Hot Submarkets - 2Q 2012 Submarket Class Absorption Dwntwn / Mdtwn / East Sac Community Neighborhood 25,970 SF Elk Grove Community Neighborhood 22,326 SF Roseville / Rocklin Community Neighborhood 21,347 SF Rio Linda / N Highlands Community Neighborhood 19,805 SF Carmichael / Fair Oaks Strip 13,267 SF Cold Submarkets - 2Q 2012 Submarket Class Absorption Elk Grove Power Regional (57,755) SF Highway 50 Community Neighborhood (35,874) SF South Sacramento Strip (26,235) SF South Sacramento Community Neighborhood (24,582) SF Citrus Heights / Orangevale Community Neighborhood (16,726) SF We expect submarket activity in the 3rd Quarter of 2012 to yield better results than those included above, but will still be tempered by cautious consumer confidence. Submarkets showing the greatest interest to tenants and buyers during 2nd Quarter 2012 included Elk Grove and Roseville, with Natomas picking up interest. There are clearly both positive and negative pressures impacting the current retail recovery in Sacramento. The bottom line is that for now, current leasing activity continues to move forward. We anticipate approximately 150,000 square feet of positive net absorption during 3rd quarter 2012, with the next four quarters to record net positive leasing activity. p. 4 Colliers International
Lease Rates As of June 30, 2012, the average monthly direct asking rent for all retail properties throughout the Sacramento metro was reported at $1.46 per-square-foot (on a NNN basis). Please note that these are the direct asking rents of all retail property types in the Sacramento reporting area, and that there is a spread between rates amongst the various product types. Lease rates among Community Neighborhood and Strip Center inventory continues to slowly decline, a by-product of the prolonged weakened market that still exists in the region. On the bright side, Power Center rates remain unchanged from a year ago, mostly because this type asset is primarily Class A and that Class level of asset continues to perform well. Additionally, Quick-Service restaurants are continuing to expand and will pay above-market rents with a substantial TI package. Movement in lease rates are tied closely to vacancy, and with vacancy in the market continuing to improve we anticipate rates in the other product sectors, in addition to Power Centers, also starting to improve shortly. With respect to submarket lease rate activity, several submarkets during the past 12 months experienced an increase in its monthly average direct rate, while others posted a decline. CONCESSIONS The first three months of 2012 look familiar as it relates to tenant allowances and free rent, with both continuing to be tools used by landlords to attract quality tenants. Tenants still have the leverage for most assets other than Class A properties in good locations. The amount of concession package varies by Class, with Class C owners offering substantial free-bee s, and Class A owners having to offer very little. In most cases, the amount of concession offered by Class A owners is more than offset by the rent level. We anticipate concessions to remain stable over the next three months, with landlords likely to find some relief in the next 12 months. Key Direct Rate Metrics Retail Report 2nd Quarter 2012 Lease Rate Comparison - 2Q 2012 /SF/MO (NNN) 2Q 2011 2Q 2012 % Change Community Neighborhood $1.49 $1.44-3.4% Power Center $1.93 $1.93 0% Strip Center $1.33 $1.29-3.0% Monthly Lease Rate Comparison Increases Monthly Lease Rate $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $2.00 $1.75 $1.50 $1.25 Dwntwn / Midtwn / East Sac Auburn / Loomis Natomas / Northgate Q2 2011 Q2 2012 West Sacramento Woodland Monthly Lease Rate Comparison Decreases Monthly Lease Rate /SF/MO (NNN) Current Quarter (Q2 2012) $1.46 Current Year (Q2 2012) $1.46 Previous Quarter (Q1 2012) $1.48 Previous Year (Q2 2011) $1.53 Direct Average Asking Rate Full Service $2.50 $2.25 $2.00 $1.75 $1.50 $1.25 $1.00 Power Center 2012 Forecast Period 2009 2010 2011 2012 2013 Sources: CoStar & Colliers Research Community Neighborhood Forecast Period 2009 2010 2011 2012 2013 $2.50 $2.25 $2.00 $1.75 $1.50 $1.25 $1.00 $1.00 Watt Avenue Davis / Woodland Natomas / Northgate South Sacramento Point West 2Q 2011 2Q 2012 Colliers International p. 5
Retail Report 2nd quarter 2012 Construction Summary New construction trends remain limited, with only few retail projects under construction in the Sacramento area as of June 30, 2012, most related to the Palladio at Broadstone in Folsom: There remains three buildings totaling 71,774 square feet still under construction at the 550,000-square-foot Palladio at Broadstone lifestyle center in Folsom. The remaining space is expected to be completed during 3rd Quarter 2012. a 14,997 square-foot Old Navy store being built in Citrus Heights and expected to be delivered in August 2012. a 6,600 square-foot freestanding retail building being built in West Sacramento and expected to be delivered in August 2012 Investment Climate Sale activity for Sacramento retail inventory is still vigorous, with many properties changing ownership hands during the quarter. Most of the sale activity involved smaller facilities, less than 20,000 square feet, with the buyer pool predominantly ownerusers and investment companies. With respect to the retail investment market, cash is still king, and buyers with cash continue to seek out attractively priced acquisition opportunities. It will be a buyer s market for product other than Class A for at least the next 12-18 months. Financing will also continue to be an issue. As we enter the second half of 2012, we expect slow economic growth; however, with financial institutions softening their lending standards, we anticipate positive effects on the commercial real estate market. Ali Sharifi Vice President Cap Rate Analysis 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 7.3% 7.5% 7.0% 6.8% 6.4% 2007 2008 2009 2010 2011 2012 Dec Mar Source: Costar p. 6 Colliers International
Retail Report 2nd Quarter 2012 Housing Market on the Up Residential real estate s downturn has been one of the biggest influences in the state of the Sacramento area commercial real estate market. We are happy to report residential real estate is beginning to show signs of a recovery in the second quarter. Although residential property has been transacting at a low rate, those in need of housing are not always the ones buying. As mentioned in the Sacramento Bee Friday, July 27th, Record low interest rates and rock-bottom home prices make now the perfect time for buyers with modest incomes to purchase homes they can afford. In many neighborhoods, their mortgage payments would be about half the cost of rent. Getting an affordable piece of the American Dream isn t so easy, though. These would-be homeowners are competing and often losing to investors paying all cash in a frenzy to snap up cheap rental properties at the bottom of the market. In Sacramento Certified HOT As investors seize great residential deals, the average homeowner is forced to compete for the limited supply of available housing with cash offers, driving home prices upward. In an interview with Tom Beede, President & CEO of MetroList, Hudson Sangree wrote real estate agents consider a housing market heathly when it has about a six-month supply of inventory - meaning it would take six month to sell all listed homes. The Sacramento region has had less than a 30-day supply of inventory for months... Such tight inventory can lead only to upward pressure on prices as demand outpaces supply... We ve moved from a buyer s market to a seller s market... Sangree also cites Zillow s second quarter market report. Sacramento s housing market hit bottom in the first quarter of 2012, and home prices will rise here by more than twice the national average in the coming year. This is a big change from the firm s April forecast of a continuing decline in the region s home values with no sign of a bottom. Zillow also predicts given the limited new supply and lack of inventory in Sacramento... prices will rise by twice the national average in the coming year. The answer to heavy demand is to create more supply. 2012 is already seeing significant increases in annual building permits from the all-time low during 2009-2011. New home sale prices are back to 2001 levels, and entitled land is seeing an increase in activity with multiple buyers for each sale. An increase in supply will keep housing costs affordable. With the rise in building permits, an increase in regional employment will not be far behind. More housing means more jobs. More jobs means higher demand for all commercial real estate sectors. Although these are just sparks, we hope these light the fire to thaw Sacramento s CRE market. In Sacramento In Sacramento Colliers International p. 7
Retail Report 2nd quarter 2012 Sacramento Retail Market Featured Deals Sale Comparables Map # Property Location Rentable SF Sale Price Price/SF Submarket Buyer Seller 1 7440 Laguna Blvd 70,554 $18,750,000 $265.75 Elk Grove Kontoudakis Trust Khoury Family 1 2 2307 Sunset Blvd 86,935 $18,460,000 $212.34 Roseville/Rocklin Stockbridge Capital Regency Centers 2 3 3 390 Plaza Drive 14,894 $3,100,000 $208.14 Folsom Goodwill Industries Headwaters Co. 4 4 3810 Truxel Rd 50,048 $10,200,000 $203.80 Natomas/Northgate R/O Nayomas LLC JPMorgan Chase 5 3671 N Freeway Blvd 134,700 $10,850,000 $80.55 Natomas/Northgate Ashley Furniture David Berndt Lease Transactions Map # Property Location Leased SF Class Tenant Submarket Type 1 1 8451 Elk Grove Blvd 20,607 Community Center Wise Buys Elk Grove New 2 2 7255 Greenback Lane 20,000 Community Center N/A Orangevale/Citrus Heights New 3 5425 Sunrise Blvd 19,397 Community Center Tuesday Morning Orangevale/Citrus Heights New 3 4 4420 Florin Road 15,000 Community Center 99 Cents Only South Sacramento New 4 5 4420 Florin Road 10,000 Community Center Anna's Linens South Sacramento New 5 Colliers Transactions Map # Property Location Leased SF Class Tenant Submarket Type 1 2 3 4 5 6850 Five Star Blvd 54,000 Community Center American Home Furnishings Roseville/Rocklin Renewal 7923 E. Stockton Blvd 24,828 Community Center Grocery Outlet South Sacramento New 1242 Colusa Ave 17,700 Community Center Goodwill Industries Yuba City/Marysville New 3001 N Street 4,250 Restaurant IHOP Downtown/Midtown New 8300 Sierra College Blvd 3,000 Strip Center Breann Zweck Roseville/Rocklin New p. 8 Colliers International
Retail Report 2nd Quarter 2012 Yuba City Colliers International p. 9
Retail Report 2nd quarter 2012 Submarket Analysis 2Q 2012 Submarket Rentable Building Area Direct VACANCY Rate OVERALL VACANCY Rate AVAILABILITY Rate Net Absorption SF YTD Net Absorption SF Under CONSTRCUCTION SF Direct NNN AVERAGE Lease Rate $/SF/MO Arden / Howe / Watt Community Neighborhood 3,431,778 455,309 13.3% 15.3% (10,176) (38,972) 0 $1.54 Power Regional 1,313,334 254,537 19.4% 20.9% 0 2,264 0 $1.82 Strip 1,131,299 166,667 14.7% 15.8% (11,677) (18,369) 0 $1.23 Auburn / Loomis Community Neighborhood 1,009,649 86,367 8.6% 9.4% (14,563) (5,675) 0 $1.62 Strip 286,466 23,343 8.1% 11.3% (1,388) 1,257 0 $0.72 Carmichael / Fair Oaks Community Neighborhood 1,235,989 128,598 10.4% 10.3% (892) (3,383) 0 $1.30 Strip 548,756 105,927 19.3% 17.6% 13,267 6,108 0 $0.93 Citrus Heights / Orangevale Community Neighborhood 3,089,471 622,970 20.2% 22.8% (16,726) (7,446) 0 $1.29 Power Regional 332,107 18,461 5.6% 16.9% 0 0 14,997 $2.29 Strip 934,416 109,320 11.7% 13.1% 5,309 10,494 0 $1.26 Davis Community Neighborhood 937,842 55,010 5.9% 7.0% (3,110) 23,223 0 $1.43 Strip 102,133 13,087 12.8% 16.3% 338 3,813 0 $1.53 Dwntwn / Midtwn / East Sac Community Neighborhood 620,043 21,173 3.4% 3.4% 25,970 27,243 0 $1.36 Strip 434,564 25,105 5.8% 5.8% (780) (1,680) 0 $1.34 El Dorado Community Neighborhood 1,518,518 143,335 9.4% 10.9% (5,746) 914 0 $1.82 Strip 336,397 47,942 14.3% 14.3% 2,820 1,720 0 $1.35 Elk Grove Community Neighborhood 2,491,861 261,959 10.5% 10.5% 22,326 5,066 0 $1.63 Power Regional 1,521,543 97,877 6.4% 6.7% (57,755) (59,902) 0 $2.54 Strip 415,201 108,421 26.1% 26.0% (2,061) 116 0 $1.69 Folsom Community Neighborhood 2,373,986 217,763 9.2% 10.9% 3,524 35,423 0 $1.58 Power Regional 836,237 83,986 10.0% 10.0% 999 (1,545) 0 $1.28 Strip 381,195 61,039 16.0% 18.1% (2,855) (825) 0 $1.32 Highway 50 Community Neighborhood 2,568,360 594,267 23.1% 25.2% (35,874) (36,467) 0 $1.14 Strip 455,731 54,992 12.1% 15.2% (1,055) 13,807 0 $1.05 Results are from CoStar and include all retail space located in any time of shopping center or regional mall in all core areas of Sacramento, Placer, El Dorado and Yolo counties. p. 10 Colliers International
Retail Report 2nd Quarter 2012 Submarket Analysis Continued 2Q 2012 Submarket Rentable Building Area Direct VACANCY Rate OVERALL VACANCY Rate AVAILABILITY Rate Net Absorption SF YTD Net Absorption SF Under CONSTRCUCTION SF Direct NNN AVERAGE Lease Rate $/SF/MO Lincoln Community Neighborhood 527,107 149,656 28.4% 21.1% (4,866) (16,524) 0 $1.87 Power Regional 640,107 29,289 4.6% 4.6% (2,553) (7,403) 0 $2.50 Strip 61,577 20,449 33.2% 30.1% (2,428) (2,824) 0 $1.12 Natomas / Northgate Community Neighborhood 1,467,087 125,883 8.6% 10.1% 8,230 6,325 0 $1.76 Power Regional 1,742,572 254,703 14.6% 14.6% (1,967) (23,845) 0 $2.17 Strip 198,803 35,123 17.7% 20.5% (2,622) (4,450) 0 $1.32 Rio Linda / N Highlands Community Neighborhood 2,133,603 254,312 11.9% 12.4% 19,805 9,278 0 $1.09 Strip 691,051 106,377 15.4% 16.2% (11,588) (16,737) 0 $1.31 Roseville / Rocklin Community Neighborhood 5,210,817 729,819 14.0% 14.3% 21,347 103,704 0 $1.63 Power Regional 3,276,551 378,623 11.6% 13.0% (4,026) (10,533) 0 $1.29 Strip 1,095,007 283,781 25.9% 26.7% 1,246 (3,981) 0 $1.34 South Sacramento Community Neighborhood 5,308,526 646,764 12.2% 12.5% (24,582) 40,367 0 $1.43 Power Regional 734,601 117,360 16.0% 19.0% 6,620 6,620 0 $2.52 Strip 1,184,952 177,265 15.0% 15.5% (26,235) (41,284) 0 $1.22 West Sacramento Community Neighborhood 694,932 36,733 5.3% 5.3% 0 0 0 $1.45 Power Regional 1,005,303 32,492 3.2% 3.2% 11,170 11,170 6,600 $2.04 Strip 111,322 26,928 24.2% 24.2% (1,100) (5,216) 0 $2.06 Woodland Community Neighborhood 1,173,662 169,694 14.5% 14.6% 10,931 12,925 0 $1.31 Power Regional 962,117 172,021 17.9% 18.7% 0 (5,000) 0 $1.92 Strip 178,055 13,797 7.7% 7.7% (3,549) (3,549) 0 $1.09 Overall Community Neighborhood 35,793,231 4,699,612 13.1% 14.0% (4,402) 156,001 0 $1.44 Power Regional 12,364,472 1,439,349 11.6% 12.8% (47,512) (88,174) 21,597 $1.93 Specialty 2,382,750 412,505 17.3% 18.8% 20,557 28,119 71,774 $2.00 Strip 8,546,925 1,379,563 16.1% 17.0% (44,358) (61,600) 0 $1.29 Overall Market 59,087,378 7,931,029 13.4% 14.4% (75,715) 34,346 93,371 $1.46 Results are from CoStar and include all retail space located in any time of shopping center or regional mall in all core areas of Sacramento, Placer, El Dorado and Yolo counties. Colliers International p. 11
Retail Report 2nd quarter 2012 Your Experts Retail Specialists Mark Engemann Senior Vice President mark.engemann@colliers.com +1 916 563 3007 Retail Sales & Leasing Scott Laeber Senior Vice President scott.laeber@colliers.com +1 916 563 3040 Retail Sales & Leasing Ali Sharifi Vice President ali.sharifi@colliers.com +1 916 563 3064 Retail Sales & Leasing Investment Specialists John Banchero Senior Vice President john.banchero@colliers.com +1 916 563 3050 Investment Sales Steve Chamberlain Senior Vice President steve.chamberlain@colliers.com +1 916 563 3006 Investment Sales Heath Charamuga Senior Vice President heath.charamuga@colliers.com +1 916 563 3094 Investment Sales Don Howson Senior Vice President don.howson@colliers.com +1 916 563 3084 Retail Investment Sales John Jackson Vice President john.jackson@colliers.com +1 916 563 3033 Investment Sales Ben Prater Investment Advisor ben.prater@colliers.com +1 916 563 3060 Investment Sales Colliers International 301 University Avenue, Suite 100 Sacramento, CA 95825 www.colliers.com/sacramento Colliers Management Randy Dixon Managing Director randy.dixon@colliers.com +1 916 563 3023 John Shaffer Senior Research Analyst john.shaffer@colliers.com +1 916 563 3035 p. 12 Colliers International
Retail Report 2nd Quarter 2012 Colliers International 301 University Avenue, Suite 100 Sacramento, CA 95825 www.colliers.com/sacramento Colliers International p. 13