RETAIL SECTOR CONTINUES SLOW RECOVERY AFTER A HARSH WINTER

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1 RETAIL MARKET REPORT: 1Q RETAIL SECTOR CONTINUES SLOW RECOVERY AFTER A HARSH WINTER KEY INDICATORS: Key retail market indicators improved slightly this quarter. Monthly retail sales (ex: motor vehicles and parts) remained positive and have increased 4.7% YOY. The consumer sentiment index, as measured by Thomson Reuters and the University of Michigan, declined in January, but increased throughout the remainder of the first quarter, and hit a high that was previously seen in August. Consumers appear to be optimistic about the economy s prospects that signal growth will strengthen after a weather related slowdown. VACANCY: Overall, retail vacancy rates are tightening, albeit modestly. Power Centers lead the major segments with a 5.1% vacancy rate, down 20 bps from last quarter. Shopping Centers (Community, Neighborhood, and Strip centers) continued to report the highest vacancy rate at 9.9%, but the segment is showing strength, as rates are down 10 bps over last quarter and down 40 bps YOY. SUPPLY: New retail deliveries and starts decreased this quarter. Approximately 9.9 msf of retail space was delivered in 1Q, a 13.5% decrease over the previous quarter and is down 7.3% YOY. Retail construction starts declined in 1Q to 6.7 msf, a 4.8% decrease from the prior quarter and down 59.6% YOY. DEMAND: Retail absorption was positive once again in 4Q, marking the 19 th consecutive quarter of positive retail absorption at 24.4 msf, a 3.1 msf increase from 4Q. Prepared by: Hasan Rahim Real Estate Market Research PNC Real Estate 249 Fifth Avenue Pittsburgh, PA (412) Hasan.Rahim@pnc.com RENTAL RATES: Although increases were mixed, retail rents continued to move slightly higher this quarter. Effective rents increased by approximately 0.3% during 1Q over rents from 1Q. The Shopping Center segment was the only one to post a 0.1% increase YOY, while both Mall and Power Centers posted declines in rental rates. CAPITALIZATION RATES: Retail cap rates posted declines in 1Q, with mall cap rates registering a 12 bps decline to 6.19% from 4Q. Strip center and power center cap rates decreased 3 bps and 12 bps to 6.87% and 6.99%, respectively. Overall retail investment was healthy at $21.5B in 1Q, a 37.3% increase from 4Q, and a 176.3% increase YOY. PNC is a registered service mark of The PNC Financial Services Group, Inc. This document is for general informational purposes only and is not intended as specific advice or recommendations. The information contained herein is gathered from public sources believed by PNC to be accurate and reliable at time of publication, but neither PNC nor any of its affiliates is providing any guaranty or warranty as to the accuracy, completeness or reliability of that information or of the conclusions presented in this document. In addition, markets do change. Opinions expressed herein are subject to change without notice. The information set forth herein does not constitute legal, tax or accounting advice. You should obtain such advice from your own counsel or accountant. Any reliance upon the information provided herein is solely and exclusively at your own risk.. The PNC Financial Services Group, Inc. All rights reserved.

2 Consumer Sentiment Index Year-Over-Year Percentage Change KEY RETAIL INDICATORS Consumer activity accelerated in March as demand for retail goods increased following a colder than normal winter, per Marcus Millichap. Retail sales in 1Q are one of the indicators that the economy is poised to break out this spring, as consumers are shopping again after the difficult winter. 15.0% 1 5.0% U.S. Retail Sales (Excluding Motor Vehicles and Parts) Not Seasonally Adjusted Recession December - June Despite declining in January, retail sales strengthened in February and March to totaling $834.3 billion, an increase of 1.0% over 1Q. According to PNC s National Economic Outlook (April ), real disposable income was up 2.1% YOY in February, and spending was up 1.9% for the same time period. Despite the sluggish income growth, it is still above the low inflation allowing households to increase real spending. -5.0% % The adjacent chart showcases the consumer sentiment index, as measured by Thomson Reuters and the University of Michigan. The index rose to 82.3 in 1Q, a 5.4% increase from 4Q and is up 4.7% YOY. This is the highest reading for the index since August, and was propelled by increased optimism about the economy s prospects, signaling growth will strengthen after a weather-related slowdown. Source: Census Bureau, Economy.com, PNC Real Estate Market Research Recession December - June Index of Consumer Sentiment - March Preliminary 2Q results are mixed, as the index declined to 81.7 in April and rebounded to 83.0 in May, as Americans grew more upbeat about the economy and labor market. Higher stock prices and home values are underpinning sentiment for some consumers and a broadening of the pickup in employment that leads to stronger wage gains could help boost sentiment and propel consumer spending Source: Thomson Reuters, University of Michigan, PNC Real Estate Market Research According to Lynn Franco, Director of Economic Indicators at The Conference Board, consumer confidence improved slightly in May, as consumers assessed current situations more favorably. The short term outlook for the economy, jobs, and personal finances were also more upbeat and the percentage of consumers expecting their incomes to grow over the next six months is the highest since December. PNC Economics, notes that consumer spending will continue to increase at a moderate pace in the near term. Job gains, and to a lesser extent wage growth, will provide households with more income. In addition to this, banks are increasing access to credit and households should be more willing to take on debt with an improving labor market. Gains in house prices and the stock market have boosted wealth, which should make households more willing to open their purse strings.

3 Q FORECAST RETAIL MARKET TRENDS Vacancy According to Reis, vacancy rates remained flat at 10.4% in 1Q and are down 20 bps from 1Q. CBRE reports that vacancy ticked down 1 bps from the previous quarter to 11.9%, and is down 6 bps compared to 1Q. While rates remain elevated, there are signs that the metric is starting to move lower. As seen below, two segments experienced a decrease in vacancy rates compared to 4Q. CBRE and REIS forecasts indicate a protracted recovery with vacancy rates expected to dip below 1 in % 12.5% 1 7.5% 5.0% 2.5% CBRE REIS Source: CBRE, REIS, PNC Real Estate Market Research Slight changes were reported at the segment level during the first quarter. The Shopping Center segment (Community, Neighborhood, & Strip Centers) continued to remain the retail sector laggard with the highest average vacancy at 9.9% as of 1Q, down 10 bps over the previous quarter and 40 bps from a year ago. Vacancy for the Power Center segment has declined for the past 11 quarters. The Power Center segment reported a 20 bps decline in vacancy in 1Q to 5.1%, an 80bps decline YOY. Vacancy rates for the Mall segment (Regional, Super Regional, & Lifestyle Centers) increased 10 bps this quarter to 5.8%, but is still down 20 bps YOY. REIS notes that despite mixed results at the segment level, the vacancy rate is still on par with pace of improvement since the recovery began. Improvements in both the economy and labor market are not yet sufficient to translate into more meaningful declines in the vacancy rate. As reported last quarter, Class A properties continue to enjoy low vacancy, with Class B/C properties continuing to weigh on the segment overall despite limited new supply. 11.5% 10.5% 9.5% 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% Source: CoStar; PNC Real Estate Market Research U.S. Retail Vacancy by Segment Shopping Centers: 9.9% Malls: 5.8% Power Centers: 5.1% According to CoStar, coastal markets such as New York City, San Francisco, Miami, and Hawaii continue to maintain very healthy retail market fundamentals. The majority of the top 15 markets with the lowest overall retail vacancy rates reported flat or declining rates YOY. Markets with the highest retail vacancy remain clustered in western and central markets. Phoenix and Las Vegas, Memphis, and Detroit, continued to report double digit or near double digit retail vacancy rates. On a positive note, the majority of lagging markets are seeing a tightening of retail vacancy, thanks to very limited new supply and slight improvements in local economic conditions.

4 Los Angeles Chicago Minneapolis Tampa/St Petersburg Boston Orange County (California) New Construction as a % of Existing Supply San Antonio Dallas/Ft Worth Kansas City Westchester/So Connecticut Long Island (New York) Northern New Jersey Miami-Dade County Washington Las Vegas % Preleased Millions of Square Feet Supply For the quarter, starts totaled 6.7 msf, a 4.8% decrease from the previous quarter. Compared to the same period one year ago, construction starts were down 59.6%. Deliveries remain suppressed and well below the 25 msf average (1982-). As shown in the adjacent chart, new retail construction deliveries decreased in 1Q. Deliveries declined to 9.9 msf this quarter, down 13.5% from the previous quarter, and down 7.3% YOY Construction Starts & Deliveries* - As mentioned in the previous quarter, limited starts and deliveries are indicative of continued struggles for the sector, but the lack of development has served to help sustain the retail segment in the face of weakened demand. There was a recent increase in both starts and deliveries over the past four quarters, but the decline this quarter Q 3Q 4Q 1Q 2Q *Select markets 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Construction Starts 3Q 4Q 1Q 2Q Deliveries shows how difficult it is to maintain momentum in this sector. Both supplies and deliveries are expected to remain low in the short-term, until sustained economic growth returns. 3Q 4Q 1Q 2Q 3Q 4Q 1Q As noted in the previous review, new retail construction remains low nationally, but select metro areas are reporting notable additions. New construction in the most active markets during 1Q totaled 27.3 msf, or approximately 58.7% of the 46.7 msf of space currently underway. Continuing the trend from last quarter, as a percentage of existing supply, the Las Vegas market has the most space under construction, at 2.4%, as of 1Q. Shops at Summerlin Centre, a previously stalled super regional mall project contributes to 59.0% of total retail space underway in Las Vegas. Washington DC and Miami-Dade County currently have construction underway representing 1.4% and 1.3% of each market s current retail supply. The Northern New Jersey market led in total retail construction with 4.4 msf underway. A major portion of this square footage is 2.5% 2.0% 1.5% 1.0% 0.5% 1.1 % of Existing Supply % Preleased Construction Activity - Top Construction Markets Listed in Order of New Construction as a % of Existing Supply 100% 1.0 Sf Under Construction (Millions) comprised of the 2.8 msf Meadowlands Retail Market currently under construction in 4Q, with delivery expected in 1Q2015. Much of the new construction currently underway in the 15 top markets (by GLA) is substantially preleased, which will help keep vacancy rates stable in light of new deliveries % 80% 70% 60% 50% 40% 30% 20% 10% 0%

5 Net Absorption (000s sf) Net Absorption (000s sf) Net Absorption (000s sf) Demand Nationally retail absorption has been positive for 19 consecutive quarters. Net absorption for 1Q was reported at approximately 24.4 msf, up 3.1 msf from 4Q. First quarter absorption is running ahead of the four-year quarterly average. While early results are positive nationally, there still exists wide variations at the market level. 60,000 50,000 40,000 30,000 U.S. Quarterly Average Net Retail Absorption CoStar 1Q: 24,410,667 SF Of the ten top U.S. retail markets (by total GLA), all ten experienced positive absorption over the last 3 months. The Chicago market saw the highest level of annual retail absorption at 2.1 msf, up from -3.5 msf from 4Q and up from the 1.2 msf in 1Q. Other markets reporting large increases from a year ago included Philadelphia and Los Angeles, which are up 1.1 msf and 1.1 msf, respectively. Selected additional retail markets have fared as well, with most reporting similar or greater levels of retail absorption in 1Q, compared to the same period in the previous year. However, certain markets like Los Angeles reported a dramatic increase with 1.1 msf absorbed in 1Q versus -0.6 msf in 1Q. The Philadelphia market also saw strong YOY increase in absorption this quarter, with 1.1 msf absorbed compared to -0.9 msf in 1Q. Another market showing improvement from a year ago was Houston, which absorbed 1.0 msf in 1Q versus 0.6 msf a year ago. 20,000 10,000 - (10,000) Q1 Net Retail Absorption - Additional U.S. Markets 6,000,000 Net Retail Absorption TTM Net Retail Absorption TTM 5,000,000 4,000,000 3,000,000 2,000,000 1,000, ,000,000-2,000,000 Chicago Los Angeles Long Island Philadelphia Houston Washington, Detroit Atlanta Boston Dallas/Ft. D.C. Worth 3,500,000 Net Retail Absorption - Additional U.S. Markets Net Retail Absorption TTM Net Retail Absorption TTM 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , ,000 NYC (Manhattan) Orange County Miami-Dade Denver Minneapolis Charlotte Las Vegas Baltimore Seattle Phoenix

6 Average Rental Rate per Square Foot (NNN) FORECAST Q Rental Rates REIS reported that annualized effective rent declined approximately 1.9% in 1Q, while CBRE reported a 0.2% increase. According to REIS, the figure decreased 33 bps from last quarter, while CBRE s figure remains flat. Since, effective rent growth has been positive, following several years of decline brought on by the recession and the reduction in retail spending. Both CBRE and REIS are forecasting effective rent growth ranging from 3.0% to 4.8% for % 4.0% 2.0% -2.0% -4.0% -6.0% CBRE REIS Source: CBRE, REIS, PNC Real Estate Market Research Among the major retail segments, CoStar results were mixed. In 1Q, average Power Center rental rates were reported at $16.50 per sf, an increase of 0.8% over 4Q but is down 1.6% YOY. This segment continues to show resiliency in the face of several major big box closings in recent years, which typically anchor these centers. At $14.09 per square foot, average rates for Shopping Centers were up 0.2% against the previous quarter and increased 0.4% YOY. Mall rental rates were down 1.8% over last quarter and down 6.3% YOY. Class A product anchors this segment while inferior B/C product continues to be a drag on rental rates, as landlords attempt to fill space in lower quality assets. $26.00 $24.00 $22.00 $20.00 $18.00 $16.00 U.S. Retail Asking Rates by Segment Malls: $16.30 Power Centers: $16.50 Markets According to CoStar, 38 of the 75 largest U.S. retail markets saw a YOY increase in retail asking rates this quarter. Increases for this quarter were similar to the previous quarter, with top markets reporting increases ranging from 3.3% to 10.5%. Last quarter s top markets reported increases ranging from San Diego s 3.4% to San Francisco s 10.6%. San Francisco again led this quarter with a 10.5% increase in rates, followed by Little Rock at 10.4%. $14.00 Shopping Centers: $14.09 $ Q 2Q 3Q 4Q 1Q 2Q 3Q Source: CoStar; PNC Real Estate Market Research 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Lagging markets this quarter have a wide distribution throughout the U.S. The Providence, RI market saw the greatest decline in average retail rental rates with a drop of 7.1% YOY, followed by Charlotte, NC, which was down 7.0%.

7 RETAIL CAPITALIZATION RATE TRENDS Among the retail segments, mall cap rates registered a 12 bps decline easing to 6.19%. Power center and strip center cap rates ticked down by 3 bps and 12 bps, respectively. Cap rate declines were more noticeable on a YOY basis, with mall properties falling 48 bps, strip properties decreasing 9 bps, and power center properties declining by 38 bps $30 $25 $20 $15 $10 $5 Retail Sales Volume ( $ Billions) Through Q1 $21.5 $ Overall retail investment was $21.5B in 1Q, a 37.3% increase from 4Q and a 176.3% increase YOY. Per RCA, sales of individual Source: Real Capital Analytics properties totaled $11.0B, a 7 increase YOY, while portfolio transactions were $2.5B, a 43.0% increase YOY. According to RCA, pricing trends remain relatively subdued compared to the spike in volume. This does not hold true for Major Metros, however, as record high prices were set in Manhattan and Beverly Hills for space occupied by luxury goods retailers. Chanel s Madison Avenue store commanded $31,335 per square foot and Gucci s Rodeo Drive store sold for $8,074 per square foot. Investors however, were drawn to less flashy markets with Philadelphia and Seattle among the top volume gainers for 1Q. Investors continue to view malls as the favored sub-type and remain focused on acquiring assets in top-performing East and West Coast markets, steering clear of secondary cities. 10% Capitalization Rates Retail Mall - United States Through First Quarter 9% 6.56% - PwC Mall 8% 5.91% - RCA Mall 37 bps, +6.2% 7% 6.10% - RERC Mall 6% 5.27% - NCREIF Retail 42 bps, +8.2% 5% Note: NCREIF data represents current value retail cap rates. Sources: PwC Real Estate Investor Survey, Real Capital Analytics, RERC, NCREIF, PNC Real Estate Market Research 11% 10% 9% 8% 7% Capitalization Rates Retail Power and Strip Center - United States Through First Quarter 6.95% - RCA Strip Center 35 bps, +5.0% 7.10% - RERC Power Center 6.97% - PwC Strip Center 1bps, +0.1% 6.67% - PwC Power Center 6.70% - RERC Strip Center 6% 5% 0 bps, 5.27% - NCREIF Retail 42 bps, +8.2% Note: NCREIF data represents current value retail cap rates. Sources: PwC Real Estate Investor Survey, Real Capital Analytics, RERC, NCREIF, PNC Real Estate Market Research