Charlotte Metro Area

Third Quarter 2011

RETAIL STEADY, BUT BANK-RELATED EMPLOYMENT RAISES CONCERN

Potential layoffs in Charlottes nancial services sector may temporarily weigh on citywide retail sales, but with a number of moderate-sized lease transactions to commence in the second half, operations stand to rm modestly in 2011. Bank of America recently announced plans to eliminate 30,000 jobs companywide. Although the cost-cutting move will likely raise the degree of consumer uncertainty due to the banks concentration of workers in the city, the cuts are unlikely to disproportionately impact the 15,000 locally based employees. Minimal retail building, meanwhile, will help sustain positive absorption readings, as more than two dozen lease transactions involving more than 10,000 square feet are set to commence in the second half. Burlington Coat Factory, for instance, is slated to occupy 48,000 square feet at the Woodlawn Marketplace in the South Submarket this year. Trafc-generating retailers such as Planet Fitness, Dollar General and Family Dollar, will also backll mid-sized blocks of space in 2011, lending a boost to marketwide absorption and contributing to the metros rst annual vacancy improvement since before the downturn. Retail acquisition velocity has risen above year-ago lows, aided by both all-cash purchases and improved access to nancing pulling leveraged buyers back into the investment arena. Multi-tenant investors, in particular, are stepping up purchases ahead of an eventual upturn in operations. At this stage of the recovery, though, investors will continue to favor anchored shopping centers with triple-net leases in place, or high-visibility centers shadow anchored by drugstores or grocery chains. Cap rates for investment-grade, multi-tenant properties with a solid in-line tenant mix average in the low- to mid-7-percent range, while those with fewer national tenants are trading with yields starting around 9 percent. Single-tenant acquisitions, however, continue to dominate overall deal ow, driven by wealth-preservation buyers pursuing bond-like investment vehicles. Freestanding assets leased to top-rated retailers will sell with cap rates around 7 percent, depending on remaining lease terms.

2011 ANNUAL RETAIL FORECAST

0.3% increase in total employment

Employment: Private-sector job creation will offset public-sector layoffs over the second half, resulting in a net gain of 2,200 positions this year, a 0.3 percent increase. Last year, employers grew head counts by 5,400 spots.

280,000 square feet will be completed

Construction: In 2011, builders will deliver approximately 280,000 square feet of retail space, up slightly from the addition of 238,000 square feet last year.

40 basis point decrease in vacancy

Vacancy: With second half stock addition to come online fully occupied and job growth in several employment sectors to strengthen consumer spending, metrowide vacancy will fall 40 basis points this year to 9 percent. During 2010, vacancy increased 50 basis points.

0.9% increase in asking rents

Rents: This year, asking rents will tick up 0.9 percent to $17.40 per square foot, while effective rents advance 1.2 percent to $15.05 per square foot.

ECONOMY

Employment Trends
6%
Year-over-Year Change Metro Area United States

Employment levels in the Charlotte metro continue to ebb and ow, as the loss of 2,800 jobs in the second quarter ended a two-quarter streak of solid gains. During the last 12 months, local employment shrunk 1,100 positions, a 0.1 percent decrease, after losing 4,600 workers one year earlier. Recent job cuts were primarily driven by the professional and business services and government sectors, which posted an aggregate loss of 6,300 positions during the rst two quarters of this year.

3% 0% -3% -6%

07

08

09

10

11*

Seven of metros employment sectors expanded staff levels through the rst half of this year. During that time, payroll expansion was led by the leisure and hospitality sectors, which increased by 3,500 jobs, or by 4.1 percent. Outlook: Private-sector job creation will offset public-sector layoffs over the second half, resulting in a net gain of 2,200 positions this year, a 0.3 percent increase. Last year, employers grew head counts by 5,400 spots.

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

CONSTRUCTION

Retail Completions
Thousands of Square Feet

Builders delivered approximately 195,000 square feet of retail space over the last 12 months. During the preceding year, completions totaled 632,500 square feet. The 70,000-square-foot Furniture Row was the largest property delivered during the rst two quarters. The property came online fully occupied and is shadow anchored by Ikea. Nearly 420,000 square feet of retail space was under construction at the close of the second quarter, though the majority of space is scheduled to come online next year. The planning pipeline, meanwhile, consists of 5.9 million square feet of space. Outlook: In 2011, builders will deliver approximately 280,000 square feet of retail space, up slightly from the addition of 238,000 square feet last year.

2000 1500 1000 500 0

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Reis, TWR

VACANCY

The metros average retail vacancy rate improved 10 basis points in the second quarter to 9.4 percent on positive net absorption of 87,000 square feet. Vacancy increased 10 basis points when measured annually as stock additions slightly outstripped demand growth. Strengthened leasing activity for neighborhood/community centers contributed to a 50-basis-point decrease in vacancy levels over the past year, pulling down vacancy to 10.8 percent. In the prior year, vacancy rose 110 basis points. Neighborhood centers in Gaston County registered a 30-basis-point, quarter-over-quarter drop in vacancy to 9.3 percent, marking the metros strongest improvement in the April-June period. Outlook: With second-half stock additions to come online fully occupied and job growth in several employment sectors to strengthen consumer spending, metrowide vacancy will fall 40 basis points this year to 9 percent. During 2010, vacancy increased 50 basis points.

Vacancy Rate Trends

12% 10%
Vacancy Rate Metro Area United States

8% 6% 4%

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

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Retail Research Report

RENTS

Marketwide asking and effective rents each advanced 0.5 percent over the 12 months ending in the second quarter to $17.30 per square foot and $14.92 per square foot, respectively.
8%
Year-over-Year Change

Rent Trends
Asking Rent Effective Rent

Concessions averaged 13.8 percent of asking rents in the second quarter, unchanged from one year earlier. Metrowide leasing incentives totaled 11 percent prior to the recession. Community centers in Gaston County logged a 140-basis-point drop in vacancy over the last year to 18.2 percent. As such, community center operators raised asking rents 1.1 percent over the past year to $12.33 per square foot, which is just 0.8 percent below peak levels. Outlook: This year, asking rents will tick up 0.9 percent to $17.40 per square foot, while effective rents advance 1.2 percent to $15.05 per square foot.

4% 0% -4% -8%

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Reis

SINGLE-TENANT SALES TRENDS**

Although single-tenant transaction volume in the metro swelled by nearly 50 percent during the most recent 12-month period, the increase in trading was skewed heavily by year-ago lows. The median price for restaurant assets, which posted a 30 percent yearover-year decrease in trading, rose more than 30 percent over the last year to $198 per square foot as buyers targeted assets leased to national brands. Freestanding properties secured by investment-grade tenants will command cap rates around 7 percent, depending the on the location and time remaining on the lease. Properties occupied by regional tenants or franchisee will trade with direct cap at least 100 basis points higher. Outlook: Investors safeguarding against stock market volatility as well as those unsatised with low-yielding alternative investments will remain a strong driving forcing in Charlottes single-tenant arena. As a result, standalone net-leased assets with investment-grade tenants will garner strong buyer interest when brought to market.

Single-Tenant Sales Trends

Median Price per Square Foot

$350 $275 $200 $125 $50

07

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

MULTI-TENANT SALES TRENDS**

Over the last 12 months, multi-tenant property sales velocity accelerated roughly threefold from the preceding year, when overall trading slowed to a virtual standstill. Nonetheless, the number of closings registered in the past year remained limited to just a handful of properties. Multi-tenant properties sold in the last year traded at a median price of $59 per square foot, which is less than half markets pre-recession peak.
Median Price per Square Foot

Multi-Tenant Sales Trends

$150 $125 $100 $75 $50

Initial yields for local shopping centers differ vastly based on tenant mix. Multi-tenant assets anchored by trafc-generating retailers will solicit offers at cap rates in the mid-7-percent range, while unanchored strip centers containing independent shops will likely require rst-year returns at least 150 basis points higher. Outlook: Expectations for further operational strengthening, along with attractive interest rates for qualied buyers, will continue to encourage multitenant buyers to re-enter the market. Nonetheless, investors will target newer, anchored properties containing national chains as in-line tenants.

07

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

** Data reect a full 12-month period, calculated on a trailing 12-month basis by quarter.

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Retail Research Report

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CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION

Visit www.NationalRetailGroup.com or call:

Bill Rose National Director National Retail Group Tel: (858) 373-3100 bill.rose@marcusmillichap.com

The yield on the 10-year Treasury slipped to the low-2-percent range following S&Ps downgrading of U.S. debt, as investors ocked to safety amid extreme stock market volatility. In response, lenders have pushed out loan spreads by an average of 30 basis points to 50 basis points, with CMBS lenders pushing signicantly wider. Nonetheless, borrowing costs remain low. In the rst half of 2011, mortgage originations were up 60 percent when compared to the same period last year, driven by higher activity among national banks and CMBS lenders. The CMBS sector may lose momentum, however, as elevated credit spreads translate into less competitive rates. Funding for single-tenant assets with credit tenants will remain plentiful this year. All-in lending rates for drugstore assets currently fall in the high4-percent to mid-5-percent range, while loans for fast food and restaurant properties typically price 125 basis points to 175 basis points higher. In the multi-tenant sector, lenders will maintain their focus on high-quality centers in primary markets, though funding will remain available for Class B grocery- or drug-anchored centers with proven revenue streams. Deals under $10 million will again be dominated by local and regional banks, which typically offer three- to seven-year, xed-rate recourse loans. In the $10 million to $20 million range, CMBS lenders and nance companies step into the picture, while deals over $20 million typically have access to a full spectrum of sources. On average, debt yields will hover in the 9 percent to 11 percent range, translating into LTVs of 60 percent to 75 percent.

SUBMARKET OVERVIEW

Prepared and edited by

Vacancy in the East submarket has fallen 370 basis points since peaking in 2009. The areas recovery hit a soft patch in the second quarter, however, as tenant demand in neighborhood centers receded. As a result, the sectors vacancy rate rose 30 basis points to 9.5 percent between April and June. Operations in the North submarket gained footing following a stretch of demand contraction and overbuilding during the years leading up to the downturn. Between 2005 and 2010, neighborhood/community center deliveries totaled nearly 1 million square feet, or 47 percent of the metro total. Asking rents in the Gaston County submarket slipped 0.3 percent during the rst six months, and effective rents eased 0.1 percent, resulting in the metros highest average concession of 16.9 percent of asking rents.

Michael L. Brown

Research Analyst Research Services

For information on national retail trends, contact Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com Charlotte Ofce: Regional Manager rlucas@marcusmillichap.com 101 S. Tryon Street Suite 2460 Charlotte, North Carolina 28280 Tel: (704) 831-4600 Fax: (704) 831-4610 Price: $150 Marcus & Millichap 2011 www.MarcusMillichap.com

John Chang

Gary R. Lucas

SUBMARKET VACANCY RANKING

Rank
1 2 3 4

Submarket
East South North Gaston County

Vacancy Rate
6.6% 8.9% 10.8% 12.1%

Y-O-Y Basis Effective Y-O-Y Point Change Rents (psf) % Change

40 30 -50 0 $12.11 $18.94 $13.55 $9.91 -1.4% 1.2% 0.3% 0.7%

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.