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<br />National Regional Mall Market <br />REDUCED CONSUMER SPENDING, WEAK <br />RETAIL SALES, STORE CLOSURES, AND A <br />HOST OF NEGATIVE ECONOMIC ISSUES <br />ARE KEEPING THE MAJORITY OF IIWESTURS <br />FROM EAGERLY PI;RSUING OPPORTUNITIES <br />IN THE NATIONAL REGIONAL MALL MNR- <br />KET. "We are not looking to purchase <br />new retail assets this year," shares a par- <br />ticipant. Investors' diminished interest <br />in regional mall assets is evident in <br />Emerging Trends !n Real Estate•2009, <br />published recently by Pricewaterhouse <br />Coopers LLP and ULI -the Urban Land <br />Institute. In that publication, regional <br />malls ranked as the least favored core <br />property type, placing 11th (out of 11) <br />and scoring a 3.89 on a state of 1 <br />(abysmal) ro 9 (excellent) with respect <br />PRICEWATFRHOUfF0001f Rf LLP <br />to investment prospects in 2009. <br />With consumers keeping a tight li <br />on discretionary spending, many retai <br />ers are seeing their profits diminish an <br />their need for additional space declin <br />As a result, many retailers are down- <br />sizing store sizes and/or closing stores. <br />The end result has been an increase in <br />the national vacanry rate for regional <br />malls. According to Reis, the vacancy <br />rate at malls in the top 76 U.S. mark <br />rose ro 6.6% in the third quarter of 2008 <br />- its highest level since late 2001. In the <br />second quarter of 2008, this rate was <br />6.3%. Regional mall tenants that <br />recently closed stores or scaled back <br />expansions include Dillard's, Macy's, <br />Zales, Foot Locker, and Ann Taylor. <br />Overall, store closings are expected <br />d to total 148,000 in 2008, a 9.6% year- <br />I- over-year increase, according to the <br />d International Council of Shopping <br />e. Center. One retailer contributing to <br />that total is department store Mervyns, <br />which filed for Chapter 11 bankruptcy <br />and is holding going-out-of-business <br />sales at 149 of its locations. While <br />most stressed retailers will avoid bank- <br />ets ruptq next year, many of them are <br />bracing for a very slow holiday shop- <br />ping season and a difficult 2009. <br />Greater challenges in the national <br />regional mall market, as well as through- <br />out the entire commercial real estate <br />industry, have caused investors to fore- <br />cast property value declines in the year <br />ahead. While certain investors expect <br />property values ro fall as much as 15.0%, <br />others are more optimistic. "Property <br />values will slip about 5.0°r6 when you <br />combine declining occupancy and rising <br />overall cap rates," predicts one investor. <br />This quarter, the average overall cap <br />rate (OAR) ticked up 18 basis points <br />from the prior quarter to reach 6.96'i°, <br />a 28-basis-point increase from a year <br />ago, "Higher cap rates mean lower val- <br />ues," remarks a participant. Unfortu- <br />nately, few malls are expected to side <br />step value losses. "Even though Class-A <br />regional malls will continue to outper- <br />form lesser quality regional malls, over- <br />allcap rates are also increasing for <br />them," notes a participant. This quarter, <br />OARS range from 4.75% to 7.00% and <br />average 5.98% for Class-A+ regional <br />malls, while they range from 5.00% ro <br />8.30% and average 6.50% for Class-A <br />properties. fvr Class-B+ regional malls, <br />OARS range from 5.75% to 9.00% and <br />average 7.40~~°, ~,vhile they range from <br />.'.00% to 9.50% and average 8.25% <br />for Class-B assets, <br />www pwcreval.com I 1 2 <br />