auction quarterly retail webinar may 2015

Quarterly Retail Market Webinar Real Estate Research Powered by MaximusiQ

Peter Muoio, Ph.D. Chief Economist May 2015

Economic Overview

Economy Mostly on Track Providing Cyclical Tailwind to Retail

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Despite some recent weakness, support for growth is in place •  GDP growth has been healthy and well-balanced, but slowed in the winter. •  We believe some transitory issues behind recent weakness:

•  Brutal winter in many parts of country. •  West coast port closures. •  Immediate negative impact of low oil on energy sector investment.

•  Labor market much healthier: •  Job gains have strengthened, adding an average of 260,000 per month in 2014;

with strong gains throughout the first four months of the year. •  Labor force participation rate has stabilized. •  Voluntary job movement is up. •  Wage growth finally emerging.

•  Uncertainty has returned to normal levels, leading to improved consumer confidence and more confident investment.

•  Business indicators have wobbled, likely reflecting brutal winter, port closures and \also weakness in key economies abroad.

Sources: Auction.com Research

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GDP Growth Had Been Robust and Well Balanced but Continued to Slow in 1st Quarter After a Winter Slowdown, Employment Growth

Saw a Spring Awakening in April

Macro Overview

Sources: BEA, BLS, Auction.com Research

Following a Winter Freeze, Jobs Market Heating Up with the Weather

Labor Market Improving

Labor Force Participation Stabilizing Rising Quits Signal Improving Labor Market

Nominal Wages Up 2.6% YoY in Q1

Sources: BLS, Auction.com Research

6 Sources: Steven Davis, Scott Baker and Nicholas Bloom, Auction.com Research

Stronger Economic Momentum a Dividend of Lower Uncertainty but Watching Recent Uptick Closely

Uncertainty Back to Normal Levels

US Households Benefitting from Tailwind of Rising Financial and Residential Wealth

Household Wealth Has Surpassed Pre-Financial Crisis Level

Sources: Federal Reserve, Auction.com Research

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Economic Momentum Heatmap: Our Forward View of the Strength of Key Markets


Most Markets Heading in Right Direction, DC Area Slowed and NYC Suburbs Still Aching

•  Economy ratings range from 1 (very strong) to 6 (very weak) based on our analysis of current and near-term economic momentum.

•  Individual box size is based on market population.

Retail Demand Drivers and Megtarends


Retail Recovery to Accelerate Even Amid Headwinds

Stronger Macro Environment Will Accelerate Retail Recovery Over the Next 4 Years. •  Causes for optimism:

•  Healthy labor market. •  Normalized consumer confidence. •  Savings from lower energy. •  Rising home prices and improved financial wealth. •  Housing market recovery will generate housing turnover related spending.

•  However, continued rise of e-retail an ongoing headwind for retail real estate. •  Demographic trend toward urbanization boosting urban/store front asset class but hampering

suburban malls and strip centers.

Consumer Confidence Back to Healthy Historical Range… …Propelling Consumer Spending

Sources: Conference Board, Census, Auction.com Research


Oil’s Effect on Retail CRE

•  Much of the retail sales drop in Q1 has been driven by reductions in spending at gasoline stations, which also hamstrung the consumer spending component of GDP.

•  Early reports suggest consumers are saving the newfound cash, but history tells us this money will eventually find its way back into other spending.

Positive Impact from Low Energy Prices Show a Delay Before They Kick In

Sources: Census, Auction.com Research

Retail Sales at Gas Stations Have Fallen by $11 Billion/Month …

…And Right Now Consumers Are Pocketing the Savings


E-Retail Share on Non-Auto Retail Sales Continues to Grow

Bricks & Mortar Retail Sales Growth Much Weaker than E-Retail

E-Retail Now Accounts for 13.4% of Non-Auto Retail Sales and Share Even Larger Excluding Gasoline

E-Retail Sales Consistently Growing 450 bps Faster than Bricks and Mortar Sales

•  Brick & mortar retail remains under intense pressure from e-retail. •  Impact comes in form of store closings and changed footprint of stores. •  Over past 5 years e-retail has drained $6.8 billion from bricks and mortar sales. •  Over past 10 years: $12.5 billion.

Sources: Census, Auction.com Research

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Urban/Store front Retail Deal Volume Has Been Robust Lately, Far Higher Than Its Historical Average

Cap Rates Illustrate the Weakness in Malls, Non-Urban Markets

•  Retail is trending toward urbanization with demographics, especially younger consumers. •  Land is typically scarcer and more expensive in urban centers, necessitating the growth of

mixed-use and storefront retail centers. •  Prospects for malls and strip centers has dampened, major anchor tenants facing severe

trouble.

Retail Trending Toward Premium Assets and Urban Environments

Sources: RCA, Cushman & Wakefield, Auction.com Research

This Urbanization Trend Is Leaving Lower-Quality Suburban Assets Behind

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Retail Segment Fundamentals

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Retail Vacancies Remain Elevated, Still Above 10% Retail Effective Rents Creeping Up

Retail Segment Improving Slowly

Limited Supply Helping to Pull Down Vacancies

Sources: Reis, Auction.com Research

•  Retail market has seen the slowest recovery in fundamentals post Great Recession. •  No lift from housing related spending during the long housing bust hangover.

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•  We anticipate retail vacancies dropping into the mid-8% range by the end of 2018. •  This will yield an acceleration to 2.7% average annual effective rent gains in that four-

year span.

Despite Increased Competition With E-Retail, Limited Supply Will Enable Vacancy Recovery

Retail Rents Will Continue To Grow, Finally Surpassing Pre-Recession Level In 2016

Retail Recovery Will Accelerate Amid Stronger Macro Growth

Sources: Reis, Auction.com Research forecasts

Vacancies Will Decline as Demand Accelerates but Remain Above Previous Cycle Level

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More Retail Markets Are Improving; Demographics Are Destiny


Retail Struggles Notable in Midwest and Low Oil Will Slow Some Texas Markets

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market retail inventory.

Retail Capital Markets Trends

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Retail Pricing Up 12.9% from a Year Ago

Strong Retail Capital Markets

Sources: RCA, Auction.com Research

•  Despite the languid recovery in retail market fundamentals, capital markets metrics have raced back to prior peak levels.

•  The persistent low interest rate environment and increased capital flows from foreign sources have helped

•  A negative correction could take place if interest rates go up later this year or investment flows redirect to Europe as a result of quantitative easing

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Avg. PSF

Retail Transaction Volume Is Highly Liquid

Retail Transaction Values Top $85 Billion Over the Past Year


•  US retail transaction volume clocked in at $24 billion in the first quarter of 2015, down modestly from a quarter ago but up 4.8% year-over-year, according to RCA.

•  This is it’s largest 12-month rolling total since the market’s peak of $89.7 billion in Q3 2007.

Retail Market Transaction Metrics

Retail Cap Rates Dropped to Their Lowest Point in 15 Years in the Q1, 6.4%

4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0%

'08 '09 '10 '11 '12 '13 '14 '15

Cap Ra

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Malls Urban/Store front Drug Store

Diverging Cap Rates Illustrate Urban Retail/ Drug Store Rise and Malls Decline


•  US retail cap rates have fallen to their current 15-year low of 6.4% •  Urban/store front retail cap rates have declined steadily to 5% •  Drug stores also have a strong outlook, aided by their foray into medical services. •  Conversely, mall cap rates have reversed course and have surged back to 8%

currently

Auction.com Research Retail Valuation Index

Retail Valuations Will Increase Steadily

•  Retail valuations are expected to continue posing new all-time highs by 2018. •  Growth will be supported by steadily improving fundamentals, NOI growth

averaging a moderate 3.1% annually, and cap rates that will remain around 6% through 2018.

Sources: Reis, RC Analytics, Auction.com Research forecasts

Retail Market Metro Analysis


Retail’s Broad but Slow Recovery Should Continue in 2015



By 2018 All but Two Retail Markets Will Have Lower Vacancies



Regional Retail Rent Growth will Vary



Thinking of Investing in Retail?

Sources: Auction.com Research forecasts

Peter Muoio, Ph.D. 212-‐871-‐2118 pmuoio@auc=on.com

For our latest insights follow us at: www.auc4on.com/blog Twi9er: @MaximusiQ Linkedin: Auc4on.com Research www.auc4on.com

auction quarterly retail webinar may 2015

Documents

healthy labor market

retail page

market population

housing market recovery

proprietary retail recovery

q1 sources

labor market nominal

retail real estate