Cover

Table of ContentsCover 1Omnichannel Retailing 2Omnichannel Cont. 3Overall Retail Market 4Retail Market Cont. 5Big Box Report 6Big Box Cont. 7Major Transactions 8Economic Data 9New Employers 10New Retailer 11Our Services 12

Mar

ket

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METRO PHOENIX

Retail Overview, Projections, & Economic Snapshot

SUMMER 2014

Omnichannel Retailing

For retailers who are re-tooling their business plans to capture more sales, they are finding that the line between online sales, mobile sales and in-store sales has not only blurred, but has morphed into a much larger opportunity being referred to as omnichannel.

Just what is omnichannel? It is not just a buzz-word, it’s the new normal for retailers who know that it’s not business as usual as we enter the next economic chapter. Put simply, it is the evolution of the retail industry. Retailers will be concentrating on a seamless approach to reaching and tracking consumers through all of the shopping channels; these can include various mobile internet devices, computers, brick-and-mortar, television, radio, direct mail and catalog.

In a recent study from A.T. Kearney regarding the future of stores, it is noted that retailers need to provide consumers the ability to shop where and when they want and make the physical stores a place where people want to go. During the buying cycle, consumers are spending about 45% of their time online researching, and 55% of their time in the store. While online researching they are also looking at product reviews from a variety of websites and social media sites.

Shoppers still want and need brick-and-mortar stores. They use the stores to learn about new products, provide entertainment while spending time with family and friends, try on or test products, compare prices, find promotions or specials, and to a larger degree to fill an immediate need.

Shoppers still want and need brick-and-mortar stores.

Omnichannel marketing is being used by retailers to help provide personalized offers and specials to a shopper that take place when the shopper enters the store. Imagine that when a customer enters a store their mobile device is used to communicate offers or information specific to that customer. If a customer purchases a particular brand of clothing, the retailer’s omnichannel marketing sends an instant message to that customer providing a discount price on items that the customer has either purchased in the past, or might purchase in the future. These offers aren’t available to all customers; they are initiated specifically for that customer. The customer feels special in that the store offers something just for them, and that the retailer cares about their choices as a customer.

Omnichannel RetailingTrending Now at a Smart Phone on You

2

Consumers are spending about 45% of their time online researching, and 55% of their time in the store.

VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

45% 55%

Online Research In-Store Shopping

Omnichannel Cont.

Economic Indicators

Arizona is expected to have the fastest job growth at 3% annually over the next five years, as reported by Forbes Magazine.

The state’s economic growth is also forecast to expand at a U.S. best of 4.6% annually according to Moody’s Analytics. Unemployment figures are improving each year, and population growth is projected to be steadily increasing.

The outlook for Arizona is positive as our state continues to be a place where people seek a warmer climate, employment, education and retirement.

Omnichannel marketing paired with mobile device GPS tracking can be utilized in almost any store, including hardware, grocery, pharmacy, clothing, or warehouse stores. The possibilities are endless as retailers learn how to capitalize on this new way of communicating with shoppers who are already in their store.

Another way retailers are capturing greater market share is in learning how to use the stores as mini fulfillment centers. If a consumer wants a particular product and it is not in the physical store they would shop at, it can be shipped from a store that has the item in inventory. Not only does this provide the consumer with convenience and speed, it helps the retailer manage their inventory. Rather than the customer getting an “out of stock” message, they are getting an improved customer experience through better product availability and faster service. It really doesn’t matter if the sale was made online or in the store. The retailer gets the sale.

Retailers who learn to incorporate cross-channel strategies to capture more customer share will be leading the charge in this next cycle.

Brick-and-mortar stores will continue to play an important role in capturing customers and building brand loyalty. Changes in some retailer stores may include smaller footprints, and consolidation of existing locations based on the proximity to their customers. Retailers may also want to revise current performance metrics to capture that their success is not about same store sales anymore, but about sales. One store might be more of a showroom for customers who then pick up their purchases at a store more convenient to their homes, using that store as their fulfillment center.

Retailers who learn to incorporate cross-channel strategies to capture more customer share will be leading the charge in this next retail cycle.

Overall Retail Market

The Phoenix commercial retail market continues to improve in vacancy and record increased leasing activity. Vacancy rates, once hovering near 14% have now dropped to 10.6% through the 2nd quarter of 2014. During the first two quarters the market has recorded absorption of over 750,000 square feet. This coupled with 2013, which had the strongest absorption recorded since before the Great Recession six years ago, positions the market to continue to improve through the balance of 2014.

Retailers are active with new national and regional concepts announcing their arrival in the market. Activity for shop space is increasing and rental rates for premium buildings are at pre-recession levels.

With little to no speculative construction on the horizon we are accelerating the rate that vacancy declines, and even with tepid absorption, we are projecting that the entire market will be in single-digit vacancy with every regional area recovering to near pre-recession vacancy levels by the end of 2014. Phoenix is poised for continued progress.

Overall Phoenix Retail Market Retail Vacancy Rate Continues Steady Decline

Phoenix Recession Vacancy & Projections

14%

12%

10%

8%

6%

4%

2%

0%

‘09

4Q

‘10

2Q

‘10

4Q

‘11

2Q

‘11

4Q

‘12

2Q

‘12

4Q

‘13

2Q

‘13

4Q

TO

DA

Y

‘14

4Q

‘15

2Q

‘15

4Q

Projecting single digit 9.9% by 4Q 2014

Historical Absorption: Projecting 2 million SF for 2014Leasing activity is continuing an upward trend showing positive results for eleven straight quarters. For the past 2-1/2 year’s absorption has totaled over 6.2 million square feet. Through 2nd quarter of 2014 the market absorbed over 750,000 square feet of space, setting a pace of 2 million square feet for 2014.

4 VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

1,500,000

1,000,000

500,000

0 SF

–500,000

–1,000,000

‘08

2Q

‘08

4Q

‘09

2Q

‘09

4Q

‘10

2Q

‘10

4Q

‘11

2Q

‘11

4Q

‘12

2Q

‘12

4Q

‘13

2Q

‘13

4Q

‘14

2Q

PROJECTIONS

Q3

20

11 •

13

.82

%

Q2

20

14 •

10

.66

%

High Tide of Recession

Retail Market Cont.

SoutheastThe largest regional area in terms of total retail square footage, the Southeast region has over 64 million square feet in 1,465 buildings. Currently, the vacancy is 12.4%, which is down 235 basis points from the highest point recorded in the 3rd quarter of 2011 when the vacancy reached 14.8%. Leasing activity through the 2nd quarter has been -116,000 square feet.

NorthThis regional area is comprised of 17.1 million square feet of retail space in 393 buildings. It is the smallest of the regional areas in our study. Currently this is one of the four regions recording single-digit vacancy at 9.0%. This is down 330 basis points from the high of 12.3% during 1st quarter of 2010. Leasing activity through the 2nd quarter is approximately 120,000 square feet.

CentralThe region is comprised of 28.3 million square feet of retail in 751 buildings, making it the 2nd largest region. Current vacancy is 12.8%, which is the highest of all of the regional areas in our study. This vacancy is an improvement of 240 basis points from the highest point recorded, which was in the 1st quarter of 2011 when it reached 15.2%. One of the factors affecting the recovery rate is that big boxes are continuing to be vacated, thus causing net leasing activity to be just over 148,000 square feet through the 2nd quarter.

NortheastThis region is comprised of 23 million square feet of retail space in 515 buildings. Current vacancy is 8.1% which is an improvement of 550 basis points from the high. This is the best recovery rate of all of the regional areas. In the 4th quarter of 2010 the vacancy in this region was 13.6%. Leasing activity is consistent and steady thus bringing the vacancy down. In the first half of the year the region has recorded nearly 256,000 square feet of absorption.

NorthwestWith 18.2 million square feet in 423 retail buildings, the Northwest region is showing slow and steady improvements. Vacancy rates have improved 470 basis points in the past two years, which is just behind the Northeast region in terms of recovery. Current vacancy is 9.0%, down from the high point of 13.7%. Absorption is just over 143,000 square feet through the 2nd quarter of the year.

SouthwestThis region is situated in a growth area of Phoenix, and was heavily affected not only by the recession, but by the residential downturn that began in 2007. Currently the region has 22.3 million square feet of retail space in over 520 buildings. The area has also recorded one of the top three recoveries, logging a 450 basis point improvement since the highest point. In the 4th quarter of 2008 the vacancy in the Southwest region reached 12.4%, now it is 7.9% -- the lowest of all of the regional areas. Leasing activity for the first half of the year was 200,000 square feet.

Northwest9.0%

Southwest7.9%

Southeast12.4 %

Northeast8.1%

Central12.8%

North9.0%

Regional Vacancy through Q2 2014The Best:SouthwestRegion 7.9%

7.9% vacancy the lowest of all

22.3 million SF of retail in 520 buildings

Vacancy rate is a 450 basis point improvement from all time high

Phoenix Region Spotlight

5VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

Big Box Report

Over the past three years the Phoenix retail real estate market continues to improve with decreasing vacancy rates, and strong absorption. The vacancy that was once near 14% has now dropped to 10.6%. Absorption has been good with over 750,000 square feet absorbed during the first half of 2014. However, the one area that continues to be a cause for concern is the high number of vacant big boxes in the market. These include spaces of 10,000 contiguous square feet and greater.

In order to fully understand the big box market each regional area is analyzed by our research department with a breakdown by the types of vacant boxes and how they affect the overall region. We track the following types of boxes:

Power Centers • Neighborhood Centers

Strip Centers • Regional Centers

Free Standing Buildings

As of the second quarter of 2014, there are 7.0 million square feet of vacant big boxes in 261 buildings. This comprises 38% of our entire retail vacancy in big boxes alone. One of the reasons this is a cause for concern is when analyzing these vacancies, 59% of the vacant boxes are in neighborhood shopping centers, historically the hardest to lease with replacement tenants.

The total number of these boxes in neighborhood centers is 154, which total over 4.1 million square feet of space. Never before in the history of the Phoenix area have we even come close to having this amount of vacancy in our neighborhood shopping centers. The impending merger of Albertson’s and Safeway has the potential to add more grocery vacancy to our market.

While each regional area has a significant percentage of the total vacancy in neighborhood shopping centers, the Southeast region has 70 vacant boxes, which is the highest of all of the regional areas. It is also no coincidence that this region also has the second highest vacancy rate in the Phoenix metropolitan area at 12.4%.

What can you do if you are the owner of a vacant big box in the Phoenix area? It is important to understand how your shopping center compares with others in the area. There are several factors that affect the return on your investment and the success of your asset. Being informed of relevant market information is critical to making an educated decision for your shopping center.

We know boxes.

6 VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

When analyzing vacancies, 59% of the vacant boxes are in neighborhood shopping centers.

Big Box Space by Product Type

500 400 300 200 100 0 100 200

Neighborhood

Power Center

Regional Mall

Free Standing

Strip Center

Vacant SF Number of Properties

4.12M

1.84M

488K 6

154

71

474K 26

62K 4

Big Box Cont.

Market intelligence or market analytics play a key role in nearly every building sale or lease. While it is important to know the vacancy rate in the market, it is even more important to drill down to specifics about your product type and market area.

Following are some questions you can ask yourself about your building or asset:

1. How many vacant big boxes are in the immediate trade area (what is my competition)?

2. Are the big boxes of the same product type? Neighborhood, vs. power center, vs. anchored, vs. unanchored?

3. What is the average length of time these boxes are on the market before they lease or sell?

4. What deals have been completed recently which are similar? What was the rental rate, or concessions such as free rent or TI dollars?

5. Who would be the typical tenants to lease or buy the space? Are they already in the area?

6. Will the other tenants in my shopping center be able to stay open if the anchor space is vacant? If so, for how long?

Chances are you do not know all of these answers, or even know where you can get this information. However, we believe that these answers are critical to a successful outcome for your asset. Whether you want to lease and hold it as an investment, or whether you want to sell it as is, the information you gather to make that decision is critical.

Velocity Retail Group has invested significant resources to provide our clients with the market intelligence and market experience to help analyze their asset. We believe that this information is the only way to truly make informed decisions and create a strategy to lease or sell the asset. Please contact us to receive a study specific to your shopping center.

Big Box Absorption• 1.25 million SF of completed big box deals through 2nd Quarter of 2014

• 2.0 million SF in 2013

• 1.3 million SF in 2012

• 1.0 million SF in 2011

• 750,000 SF in 2010

• 755,000 SF in 2009

There are 261 vacant big boxes in the Phoenix area

Total of 7.0 million

SF 154 are in

neighborhood shopping centers

71 are in power centers

26 are

freestanding

7VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

Big box vacant space by region

Southeast Central Northwest Southwest Northeast North

3.4 MM SF

1.7 MM SF

624 K SF

620 K SF

382 K

290 K

125

54

27 2418 13

# Boxes

While it is important to know the vacancy rate, it is even more important to drill down to specifics about your product type and area.

7M SF Leased in 51/2 years

Major Transactions8 VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

New big box entrants into the Phoenix market include Conn’s Appliances, Living Spaces, At Home, The Tile Shop, C-A-L Ranch, Top Golf, and American Furniture Warehouse. Other existing big box tenants continued to expand such as Sprouts Farmers Market, Fallas Discount Stores and Goodwill of Central Arizona to name a few. We anticipate continued strong demand for big box space during 2014

with absorption levels matching that of last year. Of the 2.0 million square feet of big box transactions completed in 2013, Velocity Retail was involved in over half of them.

Following is a sampling of some of the more active tenants in the market:

Recent Significant Big Box Lease Transactions

Cal Ranch Southern / 35th Avenue – NWC 50,034 SF

Goodwill of Central Arizona Camelback / Interstate 17 – SEC 29,919 SF

Ross Dress For Less Greenway / 32nd Street – NEC 27,000 SF

Conn’s Appliances Scottsdale Pavilions 36,200 SF

RoomStore Happy Valley / Interstate 17 – SEC 33,862 SF

Goodwill of Central Arizona Pebble Creek Parkway / Interstate 10 – NEC 30,256 SF

Baby Town Germann / Gilbert – NEC 28,118 SF

Sprouts Farmers Market Deer Valley / 67th Avenue NWC 25,622 SF

Fallas Discount Stores Indian School / 33rd Avenue 24,390 SF

Mattress Firm SuperCenter Frank Lloyd Wright / Pima – SWC 23,958 SF

Living Spaces Frank Lloyd Wright / Scottsdale Road – SEC 133,120 SF

Of the 2.0 million square feet of big box transactions completed in 2013, Velocity Retail was involved in over half of them.

Disclaimer: Velocity Retail Group, LLC & the VRG logo are service marks of Velocity Retail Group, LLC. All other marks displayed in this document are the property of their respective owners.

Economic Data9VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

In 2006 Arizona was ranked 2nd in the nation in Job Growth

In 2009 Arizona was ranked 49th in the nation in Job Growth

In 2013 Arizona was ranked 9th in the nation in Job Growth

Arizona Job Growth

Employment lost during the Recession was close to 230,000 jobs

Since 2010 employment gains total over 110,000 jobs

Greater Phoenix Employment

6.8% - May 2014 Current national unemployment rate

6.3% - May 2014 Current Arizona unemployment rate

Unemployment

2006#2

2009#49

2013#9

During the 1990’s there were 262,000 permits

During the 2000’s there were 368,000 permits (this is over a 100,000 increase in the 10-year span)

2010 – 2013 there were 38,000 permits (recession – market correction from overbuilding)

Projections for 2014 – 2016 total 59,000 permits (on track to keep pace with in-migration)

Housing Permits

Residential Update

Dec. 2012 $164,000

May 2014 $205,000

Median Home Sales Price

25% increase

Greater Phoenix Population grew 1.8% in 2013 – totaling nearly 80,000 net in-migration

Arizona Population (2013)

Maricopa County Population

Population projected to grow 2-2.5% through 2015

Population Growth

6.6M

3.95M+2.0 –

2.5%

+

Declined from 10.8% in 2010

+1.8%

Sept. 2011 $112,000

(Source: Arizona State University & US Bureau of Labor Statistics)

(Source: Arizona State University)

(Source: Phoenix Metropolitan Housing Study)

(Source: Arizona State University & WP Carey School of Business)(Source: US Bureau of Labor Statistics)

New Employers

State Farm The company is significantly expanding their presence with over 2 million s.f. to be constructed in Tempe. This facility will have the capacity for up to 8,000 employees and will open in 2015.

GoDaddy Is expanding their footprint in the Valley with a 150,000 s.f. expansion of their Tempe facility. The company projects 1,300 employees by the end of 2014, a 33% increase.

Asurion The company expanded with over 60,000 s.f. in a new technical support center in Phoenix. New jobs added with the expansion total 500.

Direct Energy Has opened an expanded call center in Tempe with plans to grow their employment base by 500 people, which is a 150% increase in jobs.

General Motors Expanded an Information Technology Innovation Center with 150,000 s.f. and has a three to five year plan to add 1,000 jobs to the Chandler area.

CLEAResult Is expanding their employee base 300% with a new facility in Tempe that opened in 2013.

AVAir, Inc. Is constructing a 170,000 s.f. expansion of their Tempe facility that is to open by the 4th quarter of 2014.

Leclerc Foods Is adding 100 new jobs to Phoenix and expanding their facility to 165,000 s.f.

Shutterfly Opened a 100,000 s.f. production facility in Tempe in 2013.

New Shopping Centers in 2013Phoenix Premium Outlets Chandler – 360,000 square feet.

10 VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

Job Creation New companies moving to or expanding in Phoenix

Phoenix Premiumoutlets

New Retailer

The outlook is positive for the Phoenix area as tenants expanding into our market for the first time are once again in the news. Restaurants are leading the pack with new concepts now wanting to open in the Phoenix area, as well as established chains expanding with additional locations.

New Tenants to Phoenix

Retailers are active with new national and regional restaurant concepts announcing their arrival in the market.

Restaurants

Retailers

11VELOCITY RETAIL GROUP MARKET UPDATE SUMMER 2014

Retail Sales in Arizona grew sharply at the end of 2013 for the first time since the Great Recession and reached record highs. Spending of $53.2 billion was reported at the end of the year and was 7.7% higher than 2012.

Retail Sales

Our Services

2415 E. CAMELBACK ROAD | SUITE 400 | PHOENIX, AZ 85016 | 602.682.8100

velocityretail.com

Our ServicesLandlord Advisory Services Working with owners to maximize the value of their shopping center.

Tenant Representation Services Helping tenants achieve their future by securing the right locations.

Investment Advisory Services Providing sales, research and consulting services for owners and investors.

REstoreD™ Redevelop, Repurpose, Reimagine, Rethinking the Box ™

Accelerated Development Services Building your brand. accelerateddevco.com

Dave CheathamPresident, Principal

Darren PittsExecutive Vice President, Principal

Andy KrootPrincipal

Greg CoxonChief Operating Officer

Judi ButterworthSenior Vice President

Brian GastSenior Vice President

Ron AultSenior Vice President

Mike Fitz-GeraldSenior Vice President

Michael ClarkVice President

John JacksonSenior Associate

Larry Miller, Jr.Senior Associate

Nick AultAssociate