A Survey from FTI Consulting Retail Real Estate Beat

Final data analysis prepared by Oxford Economics

November 8, 2017

Executive Summary and Key Findings

The FTI Consulting Retail Real Estate Beat survey reveals a significant gap in the perceptions of mall and shopping center landlords and their retail tenants about the role of brick-and-mortar in the future of retail. Respondents demonstrated a disconnect about such priorities as location, store design and configuration, as well as conflicting views of the impact of online shopping on the retail industry’s brick-and-mortar needs.

The survey results also demonstrated divergent views of landlords and retailers about business issues such as competitive pricing and advertising and marketing support, as well as the impact of evolving consumer demographics and the shift to shopping online.

Key Findings include:

While 93% of landlords agree or strongly agree that new stores are critical to retail sales growth, just 61% of retailers agree or strongly agree.

Owners believe being near other high-traffic retailers (87%) and a compelling architectural design and physical environment (73%) are the two most important benefits a landlord could offer a retail tenant. Fewer retailers (66%) say high-traffic locations are most important and cite convenient parking (52%) as the second most important benefit.

One of the biggest disconnects between landlords and retailers is the concern about evolving consumer demographics and preferences: 70% of landlords cite this concern; while only 40% of retailers raise this issue.

Only 33% of landlords agree that shoppers require a more personalized in-store experience compared to 73% of retailers.

Landlords (60%) agree or strongly agree that customers are shopping in stores less often, while only 37% of retailers agree or strongly agree.

The results of the Retail Real Estate Beat survey of the 30 biggest retail REITs, mall and shopping center landlords and 90 U.S.-based retailers demonstrate the need for landlords and retailers to develop a better understanding of each other’s needs and how the evolving nature of retail will impact them both.

2

Question-by-question results

Landlords are far more concerned than retailers about the shift to online shopping and changing consumer

preferences, perhaps because e-commerce threatens their own business model.

They appear to underestimate the threat of competitive pricing to their tenants.

Surprisingly few property owners or tenants see an urgent need to bring products to market faster.

17%

80%

40%

70%

47%

7%

33%

3% 0% 3%

63% 54%

42% 40%

28% 23% 21% 19%

6% 3% 0%

20%

40%

60%

80%

Competitive pricingand promotional

pressure

Continued shift awayfrom physical storesto online shopping

Working capitalmanagement ormanaging capex

Evolving consumerdemographics and

preferences

Enhancing inventoryand supply-chain

systems to addressomni-channel

demands

Integrating socialmedia into the overall

marketing andcommunications

approach

Managing oroptimizing the storeportfolio or store-level economics(including staff

levels)

Need to bringproduct to market

faster

Loyalty programs Cybersecurity/Risk ofdata breach

Landlords Retailers

Shopping patterns top the list of business concerns

4

Landlords/Retailers: Which of the following business and technology trends do you expect to have the greatest impact on your tenants/your company over the next three years?

Top-three ranked responses

20.2%

14.7% 14.3% 13.4% 10.2%

7.8% 7.3% 6.8% 5.2%

18.8% 17.3%

13.0% 13.4% 10.2%

7.6% 7.3% 6.6% 5.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Clothing, shoesand accessories

Restaurants Department stores Big Box/Homegoods/ Electronics

Grocery orspecialty food

Services (i.e.,fitness clubs,

salons)

Discount anddollar stores

Entertainmentspaces

SportingGoods/Toy &

Hobby/Leisure

Today In three years

Landlords expect the store mix to stay fairly steady

5

An increase in restaurant square footage is expected to offset the decrease in clothing/shoe/accessory and department

stores over the next three years.

Most respondents anticipate little or no change in occupancy by other categories of retailers.

Landlords: Approximately what percentage of your shopping centers’ square footage comes from the following types of tenants, now and in three years?

Mean scores

Most landlords’ occupancy rates are at target or better

6

Nearly one-quarter of mall owners say their occupancy rates are above target, and only 13% are below target.

3%

23%

60%

13%

0%

0% 10% 20% 30% 40% 50% 60% 70%

Significantly above target

Above target

At target

Below target

Significantly below target

Landlords: Which of the following best describes your occupancy rates today?

Retailers predict a sharp rise in e-commerce

7

Retailers expect e-commerce to account for 23.6% of their sales in three years, up from 16.1% today.

Meanwhile, they expect in-store sales to decline to 76.1% of sales in three years from 83.4% today.

36.9%

46.5%

10.3% 5.8% 0.4%

32.1%

44.1%

12.8% 10.8% 0.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Standalone physical stores Physical stores within malls orshopping centers

E-commerce: Desktop E-commerce: Mobile device Neither physical nor e-commerce(e.g., catalogue, phone)

Today In three years

Retailers: Approximately what percentage of your company’s revenue nationwide comes from the following channels, now and in three years?

Mean scores

Landlords value physical stores more than their tenants do

8

Property owners may overestimate retailers’ reliance on physical locations for growth and brand identity.

Yet they appear far more attuned than their tenants to the shift to online shopping.

Retailers’ focus on personalized experiences suggests they are betting on omnichannel for growth.

93% 87%

60% 57% 47% 47%

33% 7%

61%

76%

37% 48%

39% 43%

73%

22%

0%

20%

40%

60%

80%

100%

New physical stores are critical to my

tenants’/my revenue growth.

Physical locations are critical to my

tenants’/my brand identity.

Retail customers areshopping in stores

less often.

My tenants/We havea strategy for

managing the shiftfrom physical stores

to online.

Profitability is a challenge at my

tenants’/my physical locations.

Attracting newcustomers to

their/my physicalstores is increasingly

challenging.

My tenants’/My shoppers require a more personalized in-store experience.

It is difficult for mytenants/me to attractyounger shoppers totheir physical stores.

Landlords Retailers

Landlords/Retailers: To what extent do you agree with the following statements?

"Agree" and "strongly agree" responses

A disconnect on retailer priorities?

9

Landlords and retailers have similar top priorities for brick-and-mortar stores: location, design, and parking.

However, landlords overestimate the importance of these basics to their tenants—while underestimating the

importance of flexible store configuration and lease terms.

Retailers’ interest in flexible store configuration may reflect their focus on offering a more personalized in-store

shopping experience.

87%

73% 63%

47%

10% 10% 7%

3%

66%

44% 52%

47% 40%

13%

27%

11% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Location near otherhigh-traffic retailers

Compellingarchitectural design

and physicalenvironment

Convenient parking Promotionalevents/grand

attractions to drawshoppers

Flexible storeconfiguration

Digital infrastructure Flexibility on leaseterms

Mall-sponsoredmobile apps

Landlords Retailers

Landlords/Retailers: Which of the following are most important for your retail tenants/brick-and-mortar locations?

Top-three ranked responses

Owners and tenants see real estate amenities differently

10

Landlords’ and retailers’ different perceptions of amenities largely mirror their priorities.

However, landlords are much more likely to say they offer promotional events than retailers.

10% 3%

23%

73% 60%

30%

53% 60%

90% 93%

77%

20%

7% 70%

3%

37%

36% 41% 49%

34% 48% 46% 42%

56%

64% 57% 51%

44% 30% 36%

12%

43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Landlords to some extent Landlords to a great extent Retailers to some extent Retailers to a great extent

Landlords/Retailers: To what degree do your landlords provide these benefits/do you provide these benefits for your tenants?

Not all retailers value owners’ traffic-boosting plans

11

Overall, landlords are already improving the things their tenants value most: marketing, physical access and

environment, and security.

Nearly half (43%) of property owners expect to be adding more non-retail options to increase mall traffic in three

years.

93% 93% 97% 93%

57%

73%

87%

23%

97% 97% 97% 97% 97% 97% 97%

43%

71% 66% 64% 61% 56% 54% 52%

3% 0%

20%

40%

60%

80%

100%

Increasing traditionaladvertising and

marketing, includingspecial events

Improving access,parking and traffic

flow

Enhancing thephysical

environment andcommon areas

Increasing security Increasing use ofsocial media and

mobile applications

Adding more foodand entertainment

options

Adding new andinnovative storeconcepts to the

tenant mix

Adding other non-retail options

Landlords doing this today Landlords doing this in three years Valued by retailers to a great extent

Landlords: What are you doing to increase traffic to your retailers today? In three years?

Retailers: To what extent do you value these landlord initiatives to increase mall traffic?

Retailers see an omnichannel future

12

Nearly half have already altered their store inventory management, and three-quarters plan to do so in three

years.

Return and shipping options will continue expanding to reflect changing customer expectations.

Nearly half (44%) of retailers plan to improve price transparency and checkout in three years, and more than

half (53%) will adjust store staffing levels.

44%

53%

44%

64%

67%

69%

74%

24%

28%

29%

39%

40%

46%

48%

0% 10% 20% 30% 40% 50% 60% 70% 80%

The check-out experience

Store staffing levels

Price transparency

Shipping options (buy in-store, free delivery)

Flexible return policies (including return of items bought online)

Store upgrades/refreshes (ambiance and environment)

Inventory management

Have changed Will change

Retailers: To what extent, if at all, have you changed the following in your brick and mortar stores to meet new customer demands in the online era? What will you have changed in three years?

"Substantial" and "transformative change" responses

Landlords don’t always see what matters to retailers

13

A wide gap between landlord and retailer perceptions on security suggests tenants take it for granted.

Conversely, retailers are far more interested in marketing support than landlords appreciate.

63%

77%

10%

33% 37%

13%

53%

13%

69% 61%

40% 36% 31%

24% 19% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Rapid response toservice issues and

repairs

Regular upgrades andrenovations

Advertising andmarketing support

Ability to deliver tenantsor other activities that

consistently drawshoppers

Cleanliness ofshopping center and

grounds

Ease of communicationand back-office support

for billing/accounting

Security systems andprocesses

Insurance coverage

Landlords Retailers

Landlords/Retailers: Which of the following qualities do your tenants value the most? Which of the following are most important to you in a landlord?

Top-three ranked responses

Respondent Demographics

Landlords: Shopping center formats and properties owned

15

60% 17%

10%

7%

3% 3%

Mix of regional and other shopping centers

Class A super regional malls

Class B or C regional malls

Power centers

Lifestyle centers

Outlet malls

27%

37%

23%

7% 7%

20%

43%

23%

7% 7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Fewer than 50 50–100 101–250 251–500 501–1,000

Today In five years

What is your primary shopping center format?

Landlords

How many properties do you own or manage today? How many will you have in five years?

Landlords

Landlords: Property types today and added in 2 to 3 years

16

27%

20%

40%

50%

30%

33%

73%

50%

57%

53%

43%

50%

53%

20%

17%

17%

7%

17%

13%

3%

7%

7%

7%

3%

3%

0% 20% 40% 60% 80% 100%

Neighborhood/Community centers

Power centers

Lifestyle centers

Class A super regional malls

Class B or C regional malls

Central business district/urban orsuburban town centers

Outlet malls

0 1–25 26–100 101 or more

33%

37%

60%

60%

53%

40%

90%

50%

53%

33%

27%

30%

40%

10%

13%

10%

7%

13%

17%

20%

3%

0% 20% 40% 60% 80% 100%

Neighborhood/Communitycenters

Power centers

Lifestyle centers

Class A super regional malls

Class B or C regional malls

Central business district/urban orsuburban town centers

Outlet malls

0 1–5 6–15 16 or more

How many of the following types of properties do you own or manage today?

Landlords

Approximately how many properties will you redevelop, develop, or acquire in the following formats over the next 2–3 years?

Landlords

Landlords: Property types closed in 2 to 3 years

17

57%

67%

63%

83%

63%

73%

97%

37%

27%

33%

17%

27%

20%

3%

3%

7%

3%

10%

7%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Neighborhood/Community centers

Power centers

Lifestyle centers

Class A super regional malls

Class B or C regional malls

Central business district/urban or suburban town centers

Outlet malls

0 1–5 6–15 16 or more

How many properties will you sell, close or otherwise dispose of in the following formats over the next 2–3 years?

Landlords

Landlords: REIT status and recent revenue

18

83%

17%

Yes No

33%

10%

30%

27%

$50 million–$299 million $300 million–$499 million

$500 million–$1 billion $1 billion–$5 billion

Are you structured as a REIT?

Landlords

What was your company’s revenue for the last fiscal year?

Landlords

Landlords: Revenue growth and profitability

19

0%

63%

27%

10%

0% 10% 20% 30% 40% 50% 60% 70%

Increased significantly

Increased slightly

Remained flat

Decreased slightly

3%

47%

33%

13%

3%

0% 10% 20% 30% 40% 50%

Increased significantly

Increased slightly

Remained flat

Decreased slightly

Decreased significantly

How has your company’s revenue growth changed over the past three years?

Landlords

How has your company’s profitability changed over the past three years?

Landlords

Retailers: Decision-making authority and title

20

43%

57%

Corporate level (enterprise-wide)Regional level (Northeast, Southeast, etc.)

30%

46%

24%

C-level executive

Direct report to a C-level executive

Mid-level manager

How would you characterize your decision-making authority for your company’s real estate strategy and leasing decisions?

Retailers

Which of the following best describes your title? Retailers

82%

76%

11%

11%

14%

17%

11%

13%

3%

4%

20%

17%

2%

19%

23%

1%

21%

18%

18%

18%

Closing in three years

Opening in three years

Total in three years

Total today

< 50 50–100 101–250 251–500 501–1,000 1,001+

17%

17%

17% 17%

17%

17%

Clothing, shoes, and accessories

Department stores

Home-related

Big Box/Electronics/Sporting goods/Toy and hobby

Discount and dollar stores

Consumer services (e.g., fitness clubs, salons)

Retailers: Number of stores and industry segment

21

Approximately how many physical stores does your company operate today, nationwide? Approximately how many do you

expect to have in three years?

Total

What is your industry segment?

Retailers

Retailers: Overall recent revenue and same-store sales

22

27%

13%

13%

13%

7%

12%

27%

7%

7%

33%

13%

7%

16%

13%

20%

13%

13%

13%

13%

14%

33%

13%

40%

40%

40%

67%

39%

47%

27%

33%

7%

19%

Consumer services (e.g., fitnessclubs, salons)

Discount and dollar stores

Big Box/Electronics/Sportinggoods/Toy and hobby

Home-related

Department stores

Clothing, shoes, and accessories

Total

$50 million–$249 million $250million–$499 million

$500 million–$1 billion $1 billion–$5 billion

$5 billion or more

20%

20%

13%

9%

20%

13%

7%

27%

27%

33%

21%

7%

40%

27%

7%

20%

33%

22%

67%

27%

47%

47%

27%

27%

40%

7%

20%

13%

7%

8%

Consumer services (e.g., fitnessclubs, salons)

Discount and dollar stores

Big Box/Electronics/Sportinggoods/Toy and hobby

Home-related

Department stores

Clothing, shoes, and accessories

Total

Decreased significantly Decreased slightly

Remained flat Increased slightly

Increased significantly

What was your company's annual revenue for the last fiscal year?

How has your company’s average revenue per store (i.e., same-store sales) changed over the past three years?

Retailers: Profitability

23

7%

13%

13%

6%

27%

27%

20%

27%

33%

33%

28%

13%

40%

27%

20%

13%

33%

24%

60%

13%

40%

33%

27%

27%

33%

13%

20%

13%

7%

9%

Consumer services (e.g., fitness clubs, salons)

Discount and dollar stores

Big Box/Electronics/Sporting goods/Toy and hobby

Home-related

Department stores

Clothing, shoes, and accessories

Total

Decreased significantly Decreased slightly Remained flat Increased slightly Increased significantly

How has your company’s profitability changed over the past three years?

Contacts

Cynthia Nelson

Senior Managing Director

Real Estate & Infrastructure

(213) 452-6026 direct

cynthia.nelson@fticonsulting.com

633 W. 5th Street, Suite 1600

Los Angeles, CA 90071

Christa Hart

Senior Managing Director

Retail & Consumer Products

(212) 499-3619 direct

christa.hart@fticonsulting.com

Three Times Square, 9th Floor

New York, NY 10036

24

www.fticonsulting.com/realestate www.fticonsulting.com/retail

About FTI Consulting

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