A Survey from FTI Consulting Retail Real Estate Beat

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 9 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 (8) and a compelling architectural design and physical environment (7) 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 of retailers raise this issue. Only of landlords agree that shoppers require a more personalized in-store experience compared to 7 of retailers. () agree or strongly agree that customers are shopping in stores less often, while only 3 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

Shopping patterns top the list of business concerns 80% /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 Retailers 0% 1 6 Competitive pricing and promotional pressure 80% 54% Continued shift away from physical stores to online shopping Working capital management or managing capex 70% 42% Evolving consumer demographics and preferences 4 28% Enhancing inventory and supply-chain systems to address omni-channel demands Integrating social media into the overall marketing and communications approach 2 21% 19% 0% 6% Managing or optimizing the store portfolio or storelevel economics (including staff levels) Need to bring product to market faster Loyalty programs Cybersecurity/Risk of data breach 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. 4

expect the store mix to stay fairly steady : Approximately what percentage of your shopping centers square footage comes from the following types of tenants, now and in three years? Mean scores 25.0% 20.0% Today In three years 15.0% 10.0% 5.0% 20.2% 18.8% 17. 14. 14. 13.0% 13.4% 13.4% 10.2% 10.2% 7.8% 7.6% 7. 7. 6.8% 6.6% 5.2% 5. 0.0% Clothing, shoes and accessories Restaurants Department stores Big Box/Home goods/ Electronics Grocery or specialty food Services (i.e., fitness clubs, salons) Discount and dollar stores Entertainment spaces Sporting Goods/Toy & Hobby/Leisure 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. 5

Most landlords occupancy rates are at target or better : Which of the following best describes your occupancy rates today? Significantly below target 0% Below target At target Above target 2 Significantly above target 0% 10% 30% 50% 70% Nearly one-quarter of mall owners say their occupancy rates are above target, and only are below target. 6

Retailers predict a sharp rise in e-commerce Retailers: Approximately what percentage of your company s revenue nationwide comes from the following channels, now and in three years? Mean scores 50.0% 45.0% 40.0% 35.0% 30.0% Today In three years 25.0% 20.0% 15.0% 36.9% 32.1% 46.5% 44.1% 10.0% 5.0% 0.0% Standalone physical stores Physical stores within malls or shopping centers 10. 12.8% 10.8% 5.8% 0.4% 0. E-commerce: Desktop E-commerce: Mobile device Neither physical nor e-commerce (e.g., catalogue, phone) 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. 7

value physical stores more than their tenants do /Retailers: To what extent do you agree with the following statements? "Agree" and "strongly agree" responses 100% 80% Retailers 9 61% 8 76% 5 3 48% 4 4 39% 4 7 22% 0% New physical stores are critical to my tenants /my revenue growth. Physical locations are critical to my tenants /my brand identity. Retail customers are shopping in stores less often. My tenants/we have a strategy for managing the shift from physical stores to online. Profitability is a challenge at my tenants /my physical locations. Attracting new customers to their/my physical stores is increasingly challenging. My tenants /My shoppers require a more personalized in-store experience. It is difficult for my tenants/me to attract younger shoppers to their physical stores. 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. 8

A disconnect on retailer priorities? /Retailers: Which of the following are most important for your retail tenants/brick-and-mortar locations? Top-three ranked responses 100% 90% Retailers 80% 70% 50% 30% 10% 0% 8 66% Location near other high-traffic retailers 7 44% Compelling architectural design and physical environment 6 52% Convenient parking 4 4 Promotional events/grand attractions to draw shoppers 10% 10% Flexible store configuration Digital infrastructure Flexibility on lease terms 11% Mall-sponsored mobile apps 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. 9

Owners and tenants see real estate amenities differently /Retailers: To what degree do your landlords provide these benefits/do you provide these benefits for your tenants? 100% 90% 80% 70% 50% 30% 10% 0% 90% 10% 64% 5 9 36% 41% 7 2 51% 49% 7 44% 34% 30% 70% 36% 12% 48% 5 46% 42% 30% 3 4 56% to some extent to a great extent Retailers to some extent Retailers to a great extent 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

Not all retailers value owners traffic-boosting plans : 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? 100% 80% 0% 9 9 9 9 9 9 9 9 9 9 9 8 71% 7 66% 64% 61% 5 56% 54% 52% Increasing traditional advertising and marketing, including special events Improving access, parking and traffic flow Enhancing the physical environment and common areas Increasing security Increasing use of social media and mobile applications Adding more food and entertainment options Adding new and innovative store concepts to the tenant mix doing this today doing this in three years Valued by retailers to a great extent 2 4 Adding other nonretail options Overall, landlords are already improving the things their tenants value most: marketing, physical access and environment, and security. Nearly half (4) of property owners expect to be adding more non-retail options to increase mall traffic in three years. 11

Retailers see an omnichannel future 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 Inventory management 48% 74% Store upgrades/refreshes (ambiance and environment) 46% 69% Flexible return policies (including return of items bought online) 6 Shipping options (buy in-store, free delivery) 39% 64% Price transparency 29% 44% Store staffing levels 28% 5 The check-out experience 24% 44% Have changed Will change 0% 10% 30% 50% 70% 80% 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 (5) will adjust store staffing levels. 12

don t always see what matters to retailers /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 90% 80% Retailers 70% 50% 30% 10% 0% 6 69% Rapid response to service issues and repairs 7 61% Regular upgrades and renovations 10% Advertising and marketing support 36% 3 Ability to deliver tenants or other activities that consistently draw shoppers 31% Cleanliness of shopping center and grounds 24% Ease of communication and back-office support for billing/accounting 5 Security systems and processes 19% 18% Insurance coverage 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. 13

Respondent Demographics

: Shopping center formats and properties owned What is your primary shopping center format? How many properties do you own or manage today? How many will you have in five years? 50% 45% Today In five years 10% 35% 1 30% 25% 3 4 Mix of regional and other shopping centers Class A super regional malls 15% 10% 2 2 Class B or C regional malls Power centers Lifestyle centers Outlet malls 5% 0% Fewer than 50 50 100 101 250 251 500 501 1,000 15

: Property types today and added in 2 to 3 years How many of the following types of properties do you own or manage today? Approximately how many properties will you redevelop, develop, or acquire in the following formats over the next 2 3 years? Outlet malls 7 Outlet malls 90% 10% Central business district/urban or suburban town centers 5 Central business district/urban or suburban town centers Class B or C regional malls 30% 50% 1 Class B or C regional malls 5 30% 1 Class A super regional malls 50% 4 Class A super regional malls Lifestyle centers 5 Lifestyle centers Power centers 5 1 Power centers 3 5 10% Neighborhood/Community centers 50% 1 Neighborhood/Community centers 50% 0% 80% 100% 0 1 25 26 100 101 or more 0% 80% 100% 0 1 5 6 15 16 or more 16

: Property types closed in 2 to 3 years How many properties will you sell, close or otherwise dispose of in the following formats over the next 2 3 years? Outlet malls 9 Central business district/urban or suburban town centers 7 Class B or C regional malls 6 10% Class A super regional malls 8 1 Lifestyle centers 6 Power centers 6 Neighborhood/Community centers 5 3 0% 10% 30% 50% 70% 80% 90% 100% 0 1 5 6 15 16 or more 17

: REIT status and recent revenue Are you structured as a REIT? What was your company s revenue for the last fiscal year? 1 8 30% 10% Yes No $50 million $299 million $300 million $499 million $500 million $1 billion $1 billion $5 billion 18

: Revenue growth and profitability How has your company s revenue growth changed over the past three years? How has your company s profitability changed over the past three years? Decreased slightly 10% Decreased significantly Decreased slightly Remained flat Remained flat Increased slightly 6 Increased slightly 4 Increased significantly 0% Increased significantly 0% 10% 30% 50% 70% 0% 10% 30% 50% 19

Retailers: Decision-making authority and title 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 24% 30% 4 5 46% Corporate level (enterprise-wide) Regional level (Northeast, Southeast, etc.) C-level executive Direct report to a C-level executive Mid-level manager 20

Retailers: Number of stores and industry segment 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 Total today 11% 1 2 18% 18% 1 1 Total in three years 11% 11% 19% 21% 18% 1 1 1 1 Opening in three years 76% 1 4% 2% 1% Closing in three years 82% 14% < 50 50 100 101 250 251 500 501 1,000 1,001+ 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) 21

Retailers: Overall recent revenue and same-store sales 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? Total 12% 16% 14% 39% 19% Total 9% 21% 22% 8% Clothing, shoes, and accessories 6 Clothing, shoes, and accessories Department stores Department stores Home-related Home-related 4 Big Box/Electronics/Sporting goods/toy and hobby Big Box/Electronics/Sporting goods/toy and hobby 4 Discount and dollar stores 4 Discount and dollar stores Consumer services (e.g., fitness clubs, salons) Consumer services (e.g., fitness clubs, salons) 6 $50 million $249 million $250million $499 million $500 million $1 billion $1 billion $5 billion $5 billion or more Decreased significantly Remained flat Increased significantly Decreased slightly Increased slightly 22

Retailers: Profitability How has your company s profitability changed over the past three years? Total 6% 28% 24% 9% 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) Decreased significantly Decreased slightly Remained flat Increased slightly Increased significantly 23

Contacts Cynthia Nelson Senior Managing Director Real Estate & Infrastructure (213) 452-6026 direct cynthia.nelson@fticonsulting.com 633 W. 5 th 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, 9 th Floor New York, NY 10036 www.fticonsulting.com/realestate www.fticonsulting.com/retail About FTI Consulting FTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. For more information, visit www.fticonsulting.com and connect with us on Twitter (@FTIConsulting), Facebook and LinkedIn. 2017 FTI Consulting, Inc. All rights reserved. 24