Retail_Market_and_Redevelopment_Analysis-Kosmont_Report.PDF

RETAIL MARKET & REDEVELOPMENT ANALYSIS

SELECT RETAIL CENTERS

SACRAMENTO COUNTY

DECEMBER 2018

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 1

Table of Contents

1.0 Executive Summary

2.0 Analysis Background

Data Sources Notes Retail Center Classification

3.0 National Retail Market Trends

Online Retail Sales Segmentation of Clothing Retail Markets Store Closure & Aggregation Viable Tenant Segments & Positioning Tenant Mixes of Successful Retail Centers Vacancy Reduces Patronage Subdivision of Empty Leaseholds Addition of Residential & Other Land Uses Summary of National Retail Market Trends

4.0 General County Market Conditions

Population & Income Retail Market Office Market Multifamily Residential Market

5.0 Retail Sales

Leakage Food & Beverage Stores Restaurant Sales Motor Vehicle Sales

6.0 Select Revitalization Tools

County Facilitation Change in Land Use Opportunity Zones PACE Program Site Specific Tax Revenue Pledges Development Opportunity Reserve Market Based Workout

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 2

7.0 Inventory of Profiled Centers

Metro Air Park 6525 Florin Road Florin Towne Centre Southgate Plaza 2345 Arden Way Country Club Centre County Club Plaza Del Paso Manor 4120 El Camino Ave

4128 El Camino Ave El Camino Plaza Foothill Farms Shopping Center Hillsdale Shopping Center Hillsdale Plaza Shopping Center Holesapple Property 5025 Marconi Ave Rio Linda Shopping Center Watt North Highlands Bradshaw Landing Bradshaw Square Rosemont Plaza

8.0 Selection of Targeted Centers

9.0 6525 Florin Road

Demographics – 6525 Florin Road Retail Capture & Leakage – 6525 Florin Road Traffic Counts & Public Transportation – 6525 Florin Road Proximate Retail – 6525 Florin Road Market Fundamentals – 6525 Florin Road Recommended Strategies – 6525 Florin Road

10.0 Country Club Centre

Demographics - Country Club Centre Retail Capture & Leakage – Country Club Centre Traffic Counts & Public Transportation – Country Club Centre Proximate Retail – Country Club Centre Market Fundamentals – Country Club Centre

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Recommended Strategies – Country Club Centre

11.0 El Camino Plaza

Demographics – El Camino Plaza Retail Capture & Leakage – El Camino Plaza Traffic Counts & Public Transportation – El Camino Plaza Proximate Retail – El Camino Plaza Market Fundamentals – El Camino Plaza Recommended Strategies – El Camino Plaza

12.0 Foothill Farms Shopping Center

Demographics – Foothill Farms Shopping Center Retail Capture & Leakage – Foothill Farms Shopping Center Traffic Counts & Public Transportation – Foothill Farms Shopping Center Proximate Retail – Foothill Farms Shopping Center Market Fundamentals – Foothill Farms Recommended Strategies – Foothill Farms Shopping Center

13.0 Rio Linda Shopping Center

Demographics – Rio Linda Shopping Center Retail Capture & Leakage – Rio Linda Shopping Center Traffic Counts & Public Transportation – Rio Linda Shopping Center Proximate Retail – Rio Linda Shopping Center Market Fundamentals – Rio Linda Shopping Center Recommended Strategies – Rio Linda Shopping Center

14.0 Bradshaw Square

Demographics – Bradshaw Square Retail Capture & Leakage – Bradshaw Square Traffic Counts & Public Transportation – Bradshaw Square Proximate Retail – Bradshaw Square Recommended Strategies – Bradshaw Square

15.0 Conclusion

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 4

Index of Tables & Figures

Table 1: ICSC U.S. Shopping Center Classification & Typical Characteristics Table 2: Frequency of Online Shopping by Age Group Table 3: Demographic Summary – County & Major Cities Table 4: Neighborhood Center Rent & Vacancy Table 5: Community Center Rent & Vacancy Table 6: Retail Submarket Square Footage Under Construction & Planned / Proposed Table 7: Office Submarket Rents & Vacancy Table 8: Office Submarket Square Footage Under Construction & Planned / Proposed Table 9: Residential Submarket Rents & Vacancy Table 10: Residential Submarket Units Under Construction & Planned / Proposed Table 11: Historic Taxable Sales (Total, Per Outlet, Per Capita) - Unincorporated County & Major Cities Table 12: Per Capita Spending by Retail Category – Unincorporated County & Major Cities Table 13: Per Capita Spending by Retail Category (Adjusted for Disposable Income) – Unincorporated County Table 14: Unincorporated County & Major Cities Sales Leakage (Capture) ($ Millions) Table 15: Historic Food & Beverage Store Sale Metrics (Total, Per Outlet, Per Capita) – Unincorporated County & Major Cities Table 16: Historic Restaurant Sale Metrics (Total, Per Outlet, Per Capita) – Unincorporated County & Major Cities Table 17: Historic Motor Vehicle Sale Metrics – Unincorporated County, Major Cities & Roseville Table 18: List of Profiled Centers Table 19: List of Targeted Centers & Eligible Attributes Table 20: Demographic Profile of Area within 1, 3, 5 Miles & 5, 10, 15 Minutes of 6525 Florin Road Table 21: Demographic Profile 1, 3, 5 Miles & 5, 10, 15 Minutes of Country Club Centre Table 22: Demographic Profile 0.5, 1.0, 1.5 Miles & 2.5, 5.0, 7.5 Minutes of El Camino Plaza Table 23: Demographic Profile 0.5, 1.0, 1.5 Miles & 2.5, 5.0, 7.5 Minutes of Foothill Farms Table 24: Demographic Profile 1, 2, 3 Miles & 5, 7.5, 10 Minutes of Rio Linda Shopping Center Table 25: Demographic Profile 1, 2, 3 Miles & 5, 7.5, 10 Minutes of Bradshaw Square

Figure 1: E-commerce Penetration by Market Segment / Product Category Figure 2: Subdivision of 45,000 SF Grocer (5025 Marconi Ave Brochure)

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Figure 3: Subdivision of 80,000 SF Junior Anchor (Southgate Plaza Brochure) Figure 4: University Mall Redevelopment Rendering Figure 5: Map of Sacramento County & Incorporated Cities Figure 6: Map of Retail Submarkets Table 7: Office Submarket Rents & Vacancy Table 9: Residential Submarket Rents & Vacancy Figure 9: Historic Taxable Sales Per Capita - Unincorporated County & Major Cities Figure 10: Retail Sales Capture & Leakage – Entire County ($ Millions) Figure 11: Map of County Opportunity Zones & Profiled Centers Figure 12: Map of Profiled Centers Figure 13: Aerial - 6525 Florin Road Figure 14: Map of Area within 1, 3, 5 Miles of 6525 Florin Road Figure 15: Map of Area within 5, 10, 15 Minutes of 6525 Florin Road Figure 16: Retail Leakage (Capture) - 6525 Florin Road Figure 17: Proximate Traffic Counts - 6525 Florin Road Figure 18: Proximate Mass Transit – 6525 Florin Road Figure 19: Map of Proximate Big Box Retailers – 6525 Florin Road Figure 20: Map of Proximate Discount Clothing Retailers – 6525 Florin Road Figure 21: Map of Proximate Hobby Retailers – 6525 Florin Road Figure 22: Map of Proximate Fitness Clubs – 6525 Florin Road Figure 23: Retail Rent & Vacancy – 6525 Florin Road Submarket Figure 24: Office Rent & Vacancy – 6525 Florin Road Submarket Figure 25: Residential Rent & Vacancy – 6525 Florin Road Submarket Figure 26: Aerial of Country Club Centre Figure 27: Map of Area within 1, 3, 5 Miles of Country Club Centre Figure 28: Map of Area within 5, 10, 15 Minutes of Country Club Centre Figure 29: Retail Leakage (Capture) – Country Club Centre Figure 30: Proximate Traffic Counts – Country Club Centre Figure 31: Proximate Mass Transit – Country Club Centre Figure 32: Map of Proximate Big Box Retailers – Country Club Centre Figure 33: Map of Proximate Discount Clothing Retailers – Country Club Centre Figure 34: Map of Proximate Hobby Retailers – Country Club Centre

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Figure 35: Map of Proximate Fitness Clubs – Country Club Centre Figure 36: Retail Rent & Vacancy – Country Club Centre Submarket Figure 37: Office Rent & Vacancy – Country Club Centre Submarket Figure 38: Residential Rent & Vacancy – Country Club Centre Submarket Figure 39: Aerial of El Camino Plaza Figure 40: Map of Area Within 0.5, 1.0, 1.5 Miles of El Camino Plaza Figure 41: Map of Area Within 2.5, 5.0, 7.5 Minutes of El Camino Plaza Figure 42: Retail Leakage (Capture) – El Camino Plaza Figure 43: Map of Proximate Traffic Counts - El Camino Plaza Figure 44: Map of Proximate Mass Transit – El Camino Plaza Figure 45: Map of Proximate Grocers – El Camino Shopping Center Figure 46: Retail Rent & Vacancy – El Camino Plaza Submarket Figure 47: Office Rent & Vacancy – El Camino Plaza Submarket Figure 48: Residential Rent & Vacancy - El Camino Plaza Submarket Figure 49: Aerial of Foothill Farms Shopping Center Figure 50: Map of Area Within 0.5, 1.0, 1.5 Miles of Foothill Farms Figure 51: Map of Area Within 2.5, 5.0, 7.5 Minutes of Foothill Farms Figure 52: Retail Leakage (Capture) – Foothill Farms Figure 53: Proximate Traffic Counts – Foothill Farms Shopping Center Figure 54: Proximate Mass Transit – Foothill Farms Shopping Center Figure 55: Map of Proximate Grocers – Foothill Farms Shopping Center Figure 56: Retail Rent & Vacancy – Foothill Farms Submarket Figure 57: Office Rent & Vacancy – Foothill Farms Submarket Figure 58: Residential Rent & Vacancy – Foothill Farms Submarket Figure 59: Aerial of Rio Linda Shopping Center Figure 60: Map of Area Within 1, 2, 3 Miles of Rio Linda Figure 61: Map of Area Within 5, 7.5, 10 Minutes of Rio Linda Figure 62: Retail Leakage (Capture) – Rio Linda Figure 63: Proximate Traffic Counts – Rio Linda Shopping Center Figure 64: Proximate Mass Transit – Rio Linda Shopping Center Figure 65: Map of Proximate Grocers – Rio Linda Shopping Center Figure 66: Retail Rent & Vacancy – Rio Linda Submarket

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Figure 67: Office Rent & Vacancy – Rio Linda Submarket Figure 68: Residential Rent & Vacancy – Rio Linda Submarket Figure 69: Aerial of Bradshaw Square Figure 70: Map of Area Within 1, 2, 3 Miles of Bradshaw Square Figure 71: Map of Area Within 5, 7.5, 10 Minutes of Bradshaw Square Figure 72: Retail Leakage (Capture) – Bradshaw Square Figure 73: Proximate Traffic Counts – Bradshaw Square Figure 74: Proximate Mass Transit – Bradshaw Square Figure 75: Retail Rent & Vacancy – Bradshaw Square Submarket Figure 76: Office Rent & Vacancy – Bradshaw Square Submarket Figure 77: Residential Rent & Vacancy – Bradshaw Square Submarket

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1.0 Executive Summary

Sacramento County (“County”) retained Kosmont Companies (“Kosmont”) to evaluate certain retail centers and corridors in unincorporated areas of the County. The retail locations were identified due to a concern about potential or actual declines in economic performance and vacancy.

The County identified, and Kosmont initially reviewed a total of 21 locations. Kosmont completed a site tour of each of these locations and compiled high level information including land and building area, vacancy rate, and the ownership profile for each.

Based on a review of this information Kosmont ultimately identified six centers for additional review under its Retail NOW!TM framework.

The six retail locations are all greater than four acres in land area, and either have high vacancy rates (i.e. 50% or greater), or if vacant, were previously developed with significant retail uses. Strategies to help facilitate the utilization of these properties were identified and are discussed herein. Ultimately, elements of these strategies may be appropriate for consideration and application to the balance of the 15 properties.

The decline in economic performance at retail properties within the County is indicative of a new reality being faced across the Country in the retail market. The proliferation of e-commerce and online retail sales is dramatically impacting the physical environment. Physical retail stores are facing declining sales performance, and as a result many retailers are consolidating locations, and decreasing store footprints. The demand for physical retail square footage within a given community is decreasing and being replaced by demand for warehouse and fulfillment centers in proximate but peripheral locations. These trends are expected to persist as e-commerce continues to expand into once protected market segments.

Property operators and developers are shifting tenant mixes and land uses to adapt to the broad shifts in the retail world.

Tenants that generate regular trips and patronage to a location such as fitness clubs, medical offices, and grocery stores are increasingly sought after, as are tenants that provide experiential and entertainment functions such as restaurants, and sports / game uses. Many locations are seeing the replacement of retail square footage with residential, office and hospitality uses in effort to “right size” retail development, and create a regular customer base.

Most, if not all retail locations will ultimately have to adapt to the changing retail landscape. However, the speed with which property owners adapt can vary significantly. The County may be able to help accelerate the adaptation of stagnate retail sites to programs that are more viable over the long term.

A discussion of national retail trends, County real estate fundamentals, County retail sales trends, sample revitalization tools, and a review of retail locations follow.

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2.0 Analysis Background

A brief discussion of data sources used in this Analysis, and pertinent background concepts are provided in this section.

Data Sources

Data sources utilized in the preparation of this analysis include:

• California State Board of Equalization

• California State Department of Finance

• CBRE

• CoStar

• Credit Suisse Equity Research

• eMarketer

• ESRI

• Forrester Market Research

• International Council of Shopping Centers (“ICSC”)

• InfoUSA

• Infogroup

• Invesp

• MallsDB

• REIS

• Sacramento County

• Telsey Advisory Group

• U.S. Census Bureau

Notes

Property characteristics including square footage and vacancy rates are from data sources deemed reliable, but can change frequently and may vary from current figures.

Due to the variety data sources used and availability of data, information on unincorporated areas of the County include data for the cities of Galt and Rio Vista. This data set is termed “Balance of County”, “BoC”, or “unincorporated County” herein.

A compound annual growth rate (“CAGR”) represents the average annual growth rate between two periods.

Figures are for 2018 unless otherwise noted.

Retail Center Classification

In evaluating retail markets and centers, it is useful to first understand the traditional types of retail centers. Retail centers are primarily classified based on (i) their overall size in gross leasable area (“GLA”), (ii) the type and number of tenants that occupy the center, and (iii) the format of the center (i.e. indoor, outdoor, themed buildings). These characteristics ultimately influence market segments and market areas served. ICSC’s classification for shopping centers is provided in Table 1 below.

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Table 1: ICSC U.S. Shopping Center Classification & Typical Characteristics

Type of Shopping

Center Concept

Typical

GLA

Range Typical Acres

Typical # of Anchors

Anchor

GLA

Typical # of

Tenants Typical Type of Anchors

Typical Trade Area

Super-Regional Mall

Similar in concept to regional malls, but offering more variety and assortment. 800,000+ 60-120 3+ 50-70% N/A

Full-line department store, mass merchant, discount department store, fashion apparel store, mini-anchor, cineplex or other large-scale entertainment attraction, and food-and- beverage service cluster.

5-25 miles

Regional Mall

General merchandise or fashion-oriented offerings.

Typically, enclosed with inward-facing stores connected by a common walkway. Parking surrounds the outside perimeter.

400,000- 800,000 40-100 2+ 50-70% 40-80 stores

Full-line department store, mass merchant, discount department store, fashion apparel store, mini-anchor, cineplex or other large-scale entertainment attraction, and food-and- beverage service cluster.

5-15 miles

Community Center ("Large

Neighborhood Center")

General merchandise or convenience-oriented offerings. Wider range of apparel and other soft goods offerings than neighborhood centers. The center is usually configured in a straight line as a strip, or may be laid out in an L or U shape, depending on the site and design.

125,000- 400,000 10-40 2+ 40-60% 15-40 stores

Discount store, supermarket, drug, large-specialty discount (toys, books, electronics, home improvement/furnishings or sporting goods, etc.)

3-6 miles

Neighborhood Center Convenience-oriented. 30,000-

125,000 3-5 1+ 30-50% 5-20 stores Supermarket 3 miles

Strip/ Convenience

Attached row of stores or service outlets managed as a coherent retail entity, with on-site parking usually located in front of the stores. Open canopies may connect the storefronts, but a strip center does not have enclosed walkways linking the stores. A strip center may be configured in a straight line, or have an "L" or "U" shape. A convenience center is among the smallest of the centers, whose tenants provide a narrow mix of goods and personal services to a very limited trade area.

< 30,000 <3

Anchor-less or a small convenience-store anchor.

N/A N/A Convenience store, such as a mini-mart. <1 mile

Power Center Category-dominant anchors, including discount department stores, off-price stores, wholesale clubs, with only a few small tenants.

250,000- 600,000 25-80 3+ 70-90% N/A

Category killers, such as home improvement, discount department, warehouse club and off-price stores

5-10 miles

Lifestyle Upscale national-chain specialty stores with dining and entertainment in an outdoor setting.

150,000- 500,000 10-40 0-2 0-50% N/A Large-format upscale specialty 8-12 miles

Factory Outlet Manufacturers' and retailers' outlet stores selling brand-name goods at a discount.

50,000- 400,000 10-50 N/A N/A N/A Manufacturers' and retailers' outlets 25-75 miles

Theme/ Festival

Leisure, tourist, retail and service-oriented offerings with entertaiment as a unifying theme. Often in urban areas, they may be adapted from older—sometimes historic—buildings, and part of a mixed-use project.

80,000- 250,000 5-20 Unspecified N/A N/A Restaurants, entertainment 25-75 miles

General Purpose Centers

Specialized-Purpose Centers

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3.0 National Retail Market Trends

The national retail market is transitioning due the shift in retail sales from an exclusively in person experience at physical retail stores (“brick and mortar”) to online sales. While e-commerce is not expected to make physical retail locations obsolete, it is dramatically shifting the brick and mortar landscape. As discussed below, e-commerce is driving the segmentation of retail markets and store closures, while also driving the expansion of unique, entertainment, and experience-based retailers and tenants.

Online Retail Sales

The biggest shift in retail of late is the move in sales from traditional brick and mortar locations to online sales. Credit Suisse Equity Research analysts estimate that within the next 10 years 30-40% of retail sales will be completed online. This is having a direct impact on the ability of brick and mortar retailers to maintain the number and size of stores in a given market. There are a few advantages that physical stores have over e-commerce such as immediate access to goods (i.e. no wait for shipping), the ability to try on clothing on the spot, and shopping experience. However, these competitive advantages are being eroded as e-commerce evolves. Online retailers are compressing distribution times from multi-day to single day to same day delivery, testing the ability to try on clothing virtually, and are beginning to open small physical showroom locations where customers can try on or inspect goods purchased online.

A retailer that holds large quantities of inventory in multiple 100,000 plus square foot stores is now competing with retailers that can hold inventory in consolidated warehouses in locations with low real estate costs but in close enough proximity to rapidly distribute goods directly to consumers, or to small showrooms (i.e. 2,000 – 5,000 square feet). This trend is also driving an increase in demand for industrial properties proximate to consumer markets for fulfillment centers and to facilitate last mile delivery.

Online retailer’s efforts to continually improve the e-commerce experience, demographic shifts, and rapid adoption of technology by younger cohorts is expected to continue to drive reductions in typical physical store sizes and counts. A summary of the current frequency of online shopping by age group follows in Table 2 below.

Table 2: Frequency of Online Shopping by Age Group

Frequent Occasional Infrequent

Age Shop at least once per week Shop at least once per month Shop at least once per year

18-29 35% 41% 24% 30-39 37% 35% 28% 40-49 23% 35% 42% 50-64 17% 38% 45% 65+ 11% 31% 58%

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Over time the frequency and volume of online shopping will increase and e-commerce will continue to penetrate further into traditional retailer segments. Online retailers are continually testing new business models and improving technology to expand reach into market segments currently dominated by physical retail locations. A summary of current penetration rates of online retailers for various market segments / product categories follows in Figure 1 below.

Figure 1: E-commerce Penetration by Market Segment / Product Category

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Segmentation of Clothing Retail Markets

As clothing retail sales move and expand online, sales at brick and mortar locations are becoming increasingly segmented into off-price, fast fashion, and high fashion segments, and the space once occupied by many department stores such as Macy’s, J.C. Penny, and middle market retailers is decreasing.

Off-price retailers such as TJ Maxx (Marshall’s and HomeGoods parent), Ross, and Burlington have experienced notable sales growth of late despite having no online presence.

High fashion retailers such as Nordstrom, and Saks Fifth Avenue and are seeing growth augmented by online sales, and fast fashion segments such as H&M, Zara, and Old Navy are experiencing mixed in store sales growth, but generally seeing online sales growth.

There are three pertinent results of these shifts. First, large middle market department stores such as Macy’s and J.C.

Penny are closing locations, and large high fashion department stores are only opening new stores in select markets, leaving many large department store buildings in secondary and tertiary locations vacant. Second, retailers in lower tier fast fashion segments that are growing don’t require large store footprints, and don’t serve as strong anchor tenants (i.e. a department store or other strong tenant that drives visits to a retail center).

As a result, these retailers typically seek to be in a location with other customer attractors / drivers, and it takes multiple tenants in the category to occupy large amounts of retail square footage. Third, retail centers are following the segmentation at the store level, and increasingly positioned as either (i) an outlet mall, (ii) a high-end mall, or (iii) a regional / super-regional mall large enough to accommodate a collection of high fashion, fast fashion, middle market, and off-price retailers.

Store Closure & Aggregation

As sales move online, many existing retail stores are not able to sustain sales at levels sufficient to justify ongoing operation at a given location. As a result, many retailers are closing store locations. The closure of stores is occurring primarily in secondary and tertiary markets, though even primary markets are seeing consolidation and aggregation. Markets that once supported multiple stores are becoming single store markets as retailers “rationalize” their physical presence to meet market demand. Retailers reducing store counts have their choice as to where to locate or remain, and property owners are chasing the same retailers. This is especially true of the grocers that serve as anchors in many of the smaller neighborhood centers in the County. Should anchor stores vacate a given center, the viability of that center can quickly deteriorate. Credit Suisse Equity Research analysts predict that 20 to 25% of mall type retail centers in the US will be closed by 2022.

Viable Tenant Segments & Positioning

Despite the continuing move of retail sales to e-commerce platforms, some retailer and tenant segments are poised to retain some competitive advantages over e-commerce. Brick and mortar retail’s primary competitive advantage is its inherent ability to provide a tactile, curated experience. Further, restaurants and drinking oriented establishments are thriving as younger demographic groups seek more experience-based

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consumption in-lieu of physical product and ownership-based consumption.

Retail stores best positioned to weather the e-commerce transition tend to have small footprints, provide unique products, a social experience, and have an online experience that integrates with the physical store (“omni-channel” retailers).

Additionally, retail property owners are focusing on increasing the presence of non-retail tenants such as restaurants, entertainment venues, medical providers, gyms, and other similar tenants that drive visits and allow patrons to shop while completing other errands.

Tenant Mixes of Successful Retail Centers

The success of a given retail center or mall is reliant on its ability to attract a complimentary mix of tenants appropriate for the patrons being targeted. Centers in affluent areas will tend to have a greater number of tenants offering higher-end merchandise, while centers serving middle and lower tier segments will tend to have a mix of tenants that provide mid-market and discount or “off-price” merchandise. Retailers will determine which centers to locate in based on which tenants will also be at a given location, and will choose locations with other stores that target similar segments of shoppers. A complementary mix of tenants helps promote the success of each individual tenant.

Vacancy Reduces Patronage

A fully tenanted center is more appealing to patrons than a center with a significant number of vacant store fronts. Thus, a fully leased 100,000 square foot center will typically be more appealing, attractive to patrons, and yield greater overall sales performance than a 200,000 square foot center with the same 100,000 square feet of tenants, and 100,000 square feet of vacant space. Patrons want to shop in a location that feels active, and alive.

Subdivision of Empty Leaseholds

Given the trends of consolidation and downsizing in the retail market, the universe of potential tenants for larger format spaces is decreasing. This results in large empty shells with limited prospects for retenanting in their existing configurations.

As a result, property owners often propose to subdivide larger spaces. Unfortunately, the resulting configuration is often less than ideal due to deep and narrow formats, dog leg configurations, and/or the addition and reorientation of store fronts. Absent a complete rebuild, there may be no alternative for retenanting these spaces. Examples of building subdivisions follow in Figure 2 and Figure 3 below.

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Figure 2: Subdivision of 45,000 SF Grocer (5025 Marconi Ave Brochure)

Figure 3: Subdivision of 80,000 SF Junior Anchor (Southgate Plaza Brochure)

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Addition of Residential & Other Land Uses

Retail center owners are increasingly pursuing the conversion of existing retail space to residential uses, and/or the addition of residential and other land uses as part of center revitalization programs.

A local example of this is the proposed redevelopment of the University Mall in Davis. The proposed project contemplates the demolition of approximately 90,700 square feet of the existing 103,700 square feet of retail uses, and construction of 264 residential units, and approximately 136,800 square feet of new retail uses. The finished project will include a total of approximately 150,000 square feet of retail uses, 412,500 square feet of residential uses, 200 surface parking spaces, and approximately 500 structured parking spaces on an approximately 8.25-acre parcel. A rendering of the proposed project follows in Figure 4 below.

Figure 4: University Mall Redevelopment Rendering

Summary of National Retail Market Trends

• Within 10 years 30-40% of all retail sales projected to occur online.

• Retailers are decreasing the square footage of their typical store and testing small format e-commerce “showroom” prototypes.

• Stores and retail centers are segregating into outlet / off-price versus high-end segments.

• Retailers are closing and aggregating stores; markets that formerly had two or three locations may only have one in the future. Large retailers in the mid-market segment are being especially hard hit.

• Retailers that are unable to adapt to market changes are going bankrupt.

• Some, though very few retailers are increasing store counts.

• Successful retailers are focusing on omni-channel experiences which helps increase brick and mortar retail sales and retain the relevance of physical store locations.

• Centers are focusing on having a mix of experience, food, entertainment, and trip generating tenants for viability.

• Retail centers are adding and combining residential, hospitality and office uses in blended use projects to generate patronage and activate retail components.

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4.0 General County Market Conditions

Population & Income

Sacramento County is home to approximately 1.5 million residents, of which approximately 600,000 live in unincorporated portions of the County. The majority of the population lives in urban and suburban environments in the City of Sacramento and the communities to the northeast, east, and south.

There are a total of seven incorporated cities within the County.

Of these seven, the five largest cities (Citrus Heights, Elk Grove, Folsom, Rancho Cordova, and Sacramento) are regularly compared herein. The remaining two cities, Galt and Rio Vista, are limited in population, and for consistency between data sources are included in “Balance of County” figures (“BoC”, “unincorporated County”)

With the exception of Sacramento, all of the Cities evaluated have populations with incomes marginally to significantly greater than the unincorporated County median household (“HH”) income of approximately $56,000. Interestingly, the average household income in the unincorporated County of approximately $82,500 is somewhat higher than the Cities of Citrus Heights, Elk Grove, Rancho Cordova, and Sacramento.

This is likely due to some households in the unincorporated County with comparatively elevated income levels. Additional details follow in Figure 5 and Table 3 below.

Figure 5: Map of Sacramento County & Incorporated Cities

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Table 3: Demographic Summary – County & Major Cities

Population 2018 2023 CAGR % BoC Households 2018 2023 CAGR % BoC Citrus Heights 88,400 92,300 0.9% 14% Citrus Heights 34,300 35,600 0.8% 15%

Elk Grove 169,400 178,000 1.0% 27% Elk Grove 52,600 55,200 1.0% 24% Folsom 79,800 85,600 1.4% 13% Folsom 27,600 29,500 1.3% 12%

Rancho Cordova 73,400 78,800 1.4% 12% Rancho Cordova 26,100 27,800 1.3% 12% Sacramento 500,700 527,000 1.0% 81% Sacramento 185,000 193,800 0.9% 83%

Balance of County 618,200 647,900 0.9% 100% Balance of County 221,800 230,900 0.8% 100% County 1,530,000 1,609,700 1.0% 247% County 547,400 572,800 0.9% 247%

Median Age 2018 2023 CAGR % BoC Avg HH Size 2018 2023 CAGR % BoC Citrus Heights 37.5 38.2 0.4% 102% Citrus Heights 2.6 2.6 0.1% 92%

Elk Grove 35.3 35.6 0.2% 96% Elk Grove 3.2 3.2 0.0% 116% Folsom 38.1 38.7 0.3% 103% Folsom 2.9 2.9 0.1% 104%

Rancho Cordova 34.5 35.0 0.3% 94% Rancho Cordova 2.8 2.8 0.2% 101% Sacramento 34.2 34.7 0.3% 93% Sacramento 2.7 2.7 0.1% 97%

Balance of County 36.9 37.6 0.4% 100% Balance of County 2.8 2.8 0.1% 100% County 35.8 36.4 0.3% 97% County 2.8 2.8 0.1% 100%

Median HH Income 2018 2023 CAGR % BoC Average HH Income 2018 2023 CAGR % BoC Citrus Heights 56,700$ 64,300$ 2.5% 101% Citrus Heights 70,700$ 82,500$ 3.1% 86%

Elk Grove 88,700 101,800 2.8% 158% Elk Grove 109,900 129,300 3.3% 133% Folsom 108,200 120,600 2.2% 193% Folsom 133,600 155,600 3.1% 162%

Rancho Cordova 59,900 70,200 3.2% 107% Rancho Cordova 78,700 93,900 3.6% 95% Sacramento 54,800 62,500 2.7% 98% Sacramento 76,900 90,700 3.4% 93%

Balance of County 56,000 67,900 3.9% 100% Balance of County 82,500 97,200 3.3% 100% County 62,200 72,600 3.2% 111% County 85,500 100,700 3.3% 104%

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Retail Market

Retail market performance appears moderately healthy overall, though individual center performance varies widely. While market area vacancy rate averages 10.0%, the median is substantially lower, at 3.5%. This is indicative of the fact that there are some centers with substantially elevated vacancy rates.

Market rents in area neighborhood centers average approximately $22 per square foot per year for non-anchor tenants, and approximately $15 per square foot for anchor tenants. Market rents in area community centers average approximately $27 per square foot for non-anchor tenants, and approximately $16 per square foot for anchor tenants.

Table 4: Neighborhood Center Rent & Vacancy

Table 5: Community Center Rent & Vacancy

Approximately 50% of area retail development was constructed between 1980 and 1999, approximately 24% was constructed before 1980, and approximately 23% was constructed between 2000 – 2009. Only 2% of all retail development was constructed subsequent to 2009.

Over the last year, the 25th to 75 percentile of property sales have yielded retail cap rates ranging from 5.0% - 9.8%, and per square foot values ranging from $114 to $298 per square foot.

Additional details for pertinent submarkets follow in Table 4 and Table 5 below.

Figure 6: Map of Retail Submarkets

Average Submarket Low Average High Low Average High Vacancy

1 Carmichael / Fair Oaks 10.12$ 20.93$ 38.33$ 8.96$ 14.08$ 22.57$ 12.4% 2 Citrus Heights / Orangevale 11.20 22.01 35.67 3.65 13.25 21.19 9.8% 3 Downtown / S. Sacramento 11.93 18.54 46.64 5.98 16.94 32.02 8.8% 4 Elk Grove 15.06 28.06 32.07 9.52 14.99 19.06 12.7% 5 Rancho Cordova 11.45 22.26 40.69 6.39 14.72 23.89 11.7%

Entire Market Area 11.35$ 21.73$ 35.67$ 5.32$ 14.57$ 24.27$ 10.5%

Non-Anchor Rent $/SF Anchor Rent $/SF

Average Submarket Low Average High Low Average High Vacancy

1 Carmichael / Fair Oaks 14.58$ 27.97$ 40.06$ 12.47$ 18.67$ 34.07$ 15.2% 2 Citrus Heights / Orangevale 15.29 26.56 34.32 5.99 14.44 20.80 6.7% 3 Downtown / S. Sacramento 16.35 23.63 21.62 6.48 13.32 18.34 20.1% 4 Elk Grove 19.26 34.87 39.82 10.53 15.35 23.83 2.9% 5 Rancho Cordova 20.40 24.95 32.20 11.33 16.31 21.24 6.1%

Entire Market Area 15.02$ 27.27$ 40.06$ 6.48$ 15.60$ 26.06$ 10.0%

Non-Anchor Rent $/SF Anchor Rent $/SF

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 20

As illustrated in Table 6 below there is approximately two million square feet of retail space under development in the greater market area, and an additional 6.6 million planned or proposed to be developed in the greater market area.

Table 6: Retail Submarket Square Footage Under Construction & Planned / Proposed

Office Market

Similar to the retail market, office market performance appears moderately healthy overall, though individual building performance varies widely. The average vacancy rate in the metro market area is 19.2%, while the median is substantially lower at 11.6%. This variance is likely due to a significant number of buildings with vacancy rates greater than 35%.

Market rents in area range from lows of approximately $12 per square foot per year to highs of approximately $40 per square foot, and average approximately $26 per square foot. Average rents do not appear to be heavily influenced by building age.

Approximately 56% of area office development was constructed between 1980 and 1999, approximately 16% was constructed before 1980, and approximately 27% was constructed between

2000 – 2009. Only 1% of all office development was constructed subsequent to 2009.

Over the last year, the 25th to 75 percentile of property sales have yielded office cap rates ranging from 4.9% - 8.3%, and per square foot values ranging from $121 to $219 per square foot.

There is currently more than 700,000 square feet of office space under construction within the greater market area, and more than 14 million square feet planned or proposed for development.

Additional details for pertinent submarkets follow in Table 7 and Table 8 below.

Sub Market Neighborhood / Community

Power / Regional Other

Neighborhood / Community

Power / Regional Other

1 Carmichael / Fair Oaks 24,700 - - 49,800 - 30,400 2 Citrus Heights / Orangevale - - - 774,300 572,500 752,700 3 Downtown / S. Sacramento 109,100 1,300,000 279,900 435,000 - 435,200 4 Elk Grove 100,000 220,800 - 372,500 - 792,800 5 Rancho Cordova - - - 1,146,800 - -

Entire Market Area 233,800 1,520,800 279,900 3,290,300 1,297,500 2,011,100

Under Construction Planned / Proposed

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 21

Table 7: Office Submarket Rents & Vacancy Figure 7: Map of Office Submarkets

Table 8: Office Submarket Square Footage Under Construction & Planned / Proposed

Multifamily Residential Market

The multifamily residential market appears to be strong with the vast majority of buildings in the market area performing well.

The average vacancy rate in the metro market area is 2.8%, while the median is moderately lower at 2.4%

Average market rents in the area range from lows of approximately $1.20 per square foot per month for larger units in less expensive areas, to highs of approximately $2.00 per square foot for smaller units in more expensive areas. Average residential rents are heavily influenced by building age.

Approximately 45% of area multifamily residential development was constructed between 1980 and 1999, approximately 37% was constructed before 1980, and approximately 15% was constructed between 2000 – 2009. Only 3% of all multifamily residential development was constructed subsequent to 2009.

Over the last year, the 25th to 75 percentile of property sales have yielded office cap rates ranging from 4.7% - 6.6%, and per square foot values ranging from $105,000 to $157,800 per unit.

Sub Market Low Average High Vacancy 1 Carmichael / Fair Oaks / Citrus Heights 12.46$ 24.21$ 29.13$ 18.5% 2 Central Northeast 13.76 23.11 31.02 22.4% 3 N & S Natomas 16.20 26.40 47.10 17.0% 4 Route 50 Corridor 9.45 21.62 27.84 25.6% 5 W & S Sacramento 15.24 22.28 32.31 14.5%

Entire Market Area 13.42$ 25.93$ 39.21$ 19.2%

Sub Market SF Under

Construction Planned &

Proposed SF 1 Carmichael / Fair Oaks / Citrus Heights 68,000 197,000 2 Central Northeast 14,500 265,300 3 N & S Natomas - 1,443,000 4 Route 50 Corridor - 355,000 5 W & S Sacramento - 1,683,200

Entire Market Area 731,200 14,329,400

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 22

There are currently more than 2,000 residential units under construction within the greater market area, and more than 8,650 multifamily residential units and almost 2,600 condominiums planned or proposed for development.

Additional details for pertinent submarkets follow in Table 9 and Table 10 below.

Table 9: Residential Submarket Rents & Vacancy Figure 8: Map of Residential Submarkets

Table 10: Residential Submarket Units Under Construction & Planned / Proposed

Average Sub Market Studio 1 Bdrm 2 Bdrm 3 Bdrm Vacancy

1 Arden Way 1.69$ 1.55$ 1.31$ 1.40$ 2.5% 2 Carmichael 1.92 1.55 1.35 1.18 1.9% 3 East Marconi - 1.27 1.14 1.29 3.0% 4 N Highlands 1.94 1.63 1.39 1.32 2.4% 5 N Sacramento 2.02 1.66 1.45 1.41 2.2% 6 Rancho Cordova 1.98 1.64 1.40 1.44 1.8% 7 South / Elk Grove 1.85 1.40 1.22 1.24 4.9%

Entire Market Area 1.86$ 1.65$ 1.44$ 1.40$ 2.8%

Rent

Sub Market Apartment Condo Apartment Condo 1 Arden Way - - - 130 2 Carmichael - - 30 - 3 East Marconi - - - - 4 N Highlands - - - - 5 N Sacramento 232 - 1,721 142 6 Rancho Cordova - - 236 1,464 7 South / Elk Grove - - 527 108

Entire Market Area 1,935 136 8,650 2,598

Under Construction Planned / Proposed

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 23

5.0 Retail Sales

Historic retail sales performance can be used to help identify a potential surplus or deficit of retail supply with a given market.

Taxable retail sales are regularly reported by retail category for large geographic areas and/or population centers. Retail performance can be measured in a number of ways by evaluating this information.

Two primary metrics evaluated herein are the volume of sales per person (per capita), from which estimates can be made as to whether an area is capturing more or less than it’s expected share of retail. When an area has more taxable sales volumes than would be expected given the area’s population and income it is said to be “capturing” sales. When an area has lower taxable sales volumes than would be expected, it is said to have sales “leakage”. A summary of historic taxable sales per capita for the largest cities in the County, and unincorporated areas follows in Figure 9 below. A detailed summary of historic taxable sales follows in Table 11 below.

Figure 9: Historic Taxable Sales Per Capita - Unincorporated County & Major Cities

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 24

Retail Sales 2009 2010 2011 2012 2013 2014 2015 2016 CAGR 2009-16

Citrus Heights $832,000,000 $854,000,000 $878,000,000 $909,000,000 $913,000,000 $921,000,000 $917,000,000 $932,000,000 1.6% Elk Grove 1,144,000,000 1,183,000,000 1,317,000,000 1,432,000,000 1,568,000,000 1,657,000,000 1,782,000,000 1,931,000,000 7.8%

Folsom 1,099,000,000 1,146,000,000 1,230,000,000 1,344,000,000 1,461,000,000 1,494,000,000 1,495,000,000 1,551,000,000 5.0% Rancho Cordova 481,000,000 619,000,000 767,000,000 812,000,000 862,000,000 874,000,000 894,000,000 945,000,000 10.1%

Sacramento 3,372,000,000 3,456,000,000 3,703,000,000 3,801,000,000 3,952,000,000 4,036,000,000 4,250,000,000 4,447,000,000 4.0% Balance of County 4,326,000,000 4,357,000,000 4,609,000,000 5,068,000,000 5,416,000,000 5,668,000,000 5,883,000,000 6,211,000,000 5.3%

County $11,252,000,000 $11,616,000,000 $12,503,000,000 $13,366,000,000 $14,171,000,000 $14,650,000,000 $15,221,000,000 $16,017,000,000 5.2%

Retail Stores 2009 2010 2011 2012 2013 2014 2015 2016 CAGR 2009-16

Citrus Heights 1,189 1,173 1,145 1,102 1,150 1,154 1,186 1,202 0.2% Elk Grove 1,676 1,736 1,669 1,649 1,723 1,791 1,811 1,838 1.3%

Folsom 1,290 1,336 1,333 1,379 1,559 1,631 1,649 1,588 3.0% Rancho Cordova 944 1,161 1,108 1,100 1,127 1,130 1,207 1,197 3.5%

Sacramento 7,485 7,976 7,655 7,862 8,117 8,445 8,935 9,334 3.2% Balance of County 9,613 9,776 9,288 9,119 8,953 8,996 9,092 9,224 -0.6%

County 22,197 23,158 22,198 22,211 22,629 23,147 23,880 24,383 1.4%

Sales Per Retail Store 2009 2010 2011 2012 2013 2014 2015 2016 CAGR 2009-16

Citrus Heights $700,000 $730,000 $770,000 $820,000 $790,000 $800,000 $770,000 $780,000 1.6% Elk Grove 680,000 680,000 790,000 870,000 910,000 930,000 980,000 1,050,000 6.4%

Folsom 850,000 860,000 920,000 970,000 940,000 920,000 910,000 980,000 2.1% Rancho Cordova 510,000 530,000 690,000 740,000 760,000 770,000 740,000 790,000 6.5%

Sacramento 450,000 430,000 480,000 480,000 490,000 480,000 480,000 480,000 0.9% Balance of County 450,000 450,000 500,000 560,000 600,000 630,000 650,000 670,000 5.9%

County $510,000 $500,000 $560,000 $600,000 $630,000 $630,000 $640,000 $660,000 3.8%

Retail Sales Per Capita 2009 2010 2011 2012 2013 2014 2015 2016 CAGR 2009-16

Citrus Heights $9,980 $10,240 $10,560 $10,830 $10,790 $10,820 $10,650 $10,720 1.0% Elk Grove 7,660 7,750 8,510 9,150 9,810 10,230 10,850 11,570 6.1%

Folsom 15,340 15,890 17,010 18,420 20,120 20,030 19,750 20,180 4.0% Rancho Cordova 7,670 9,670 11,790 12,220 12,770 12,710 12,640 13,090 7.9%

Sacramento 7,270 7,410 7,840 8,010 8,280 8,400 8,770 9,120 3.3% Balance of County 7,520 7,530 7,930 8,650 9,170 9,530 9,790 10,270 4.6%

County $8,000 $8,200 $8,750 $9,280 $9,760 $9,990 $10,270 $10,710 4.3%

Table 11: Historic Taxable Sales (Total, Per Outlet, Per Capita) - Unincorporated County & Major Cities

As illustrated in Figure 9 and Table 11 above, the unincorporated areas of the County tend to have lower sales volumes per capita than the incorporated areas. The performance per retail store in the Balance of County also tends to be lower than the incorporated areas, though this figure can be skewed by higher numbers of smaller retail locations.

Interestingly the growth in taxable sales within the Balance of County was strong, and comparatively better than most of the

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 25

incorporated areas. A detailed summary of per capita sales by retail category in the unincorporated County and major cities follows in Table 12 below. Table 13 below provides the same calculation, but is adjusted for the disposable income in the various communities. Values higher than those in the unincorporated County are denoted by a red highlight, while values less than those in the unincorporated County are denoted by a green highlight.

Table 12: Per Capita Spending by Retail Category – Unincorporated County & Major Cities

Table 13: Per Capita Spending by Retail Category (Adjusted for Disposable Income) – Unincorporated County

Retail Category Citrus Heights Elk Grove Folsom Rancho

Cordova Sacramento Balance of County County

Motor Vehicle & Parts Dealers $443 $2,729 $1,330 $1,727 $1,053 $2,267 $1,741 Furniture & Home Furnishings Stores 142 208 435 1,283 224 183 263

Electronics & Appliance Stores 448 272 368 3,860 389 185 463 Bldg Materials, Garden Equip & Supply Stores 630 537 910 1,954 782 788 812

Food & Beverage Stores 1,716 2,565 3,309 1,665 2,382 2,068 2,251 Health & Personal Care Stores 628 583 587 423 896 532 660

Gasoline Stations 827 717 803 1,447 815 851 849 Clothing & Clothing Accessories Stores 712 373 1,349 234 559 197 427

Sporting Goods, Hobby, Book & Music Stores 444 226 656 483 316 268 319 General Merchandise Stores 6,323 1,367 5,550 3,423 1,693 1,854 2,274

Miscellaneous Store Retailers 363 219 992 799 362 302 376 Nonstore Retailers 4 51 1 155 70 48 56

Food Services & Drinking Places 1,583 1,176 2,055 1,344 1,488 964 1,270

Total $14,264 $11,023 $18,345 $18,797 $11,030 $10,507 $11,759

Retail Category Citrus Heights Elk Grove Folsom Rancho

Cordova Sacramento Balance of County County

Motor Vehicle & Parts Dealers $454 $1,915 $775 $1,677 $1,127 $2,267 $1,651 Furniture & Home Furnishings Stores 145 146 254 1,247 239 183 249

Electronics & Appliance Stores 459 191 214 3,749 417 185 439 Bldg Materials, Garden Equip & Supply Stores 646 377 530 1,898 837 788 770

Food & Beverage Stores 1,758 1,800 1,929 1,617 2,550 2,068 2,134 Health & Personal Care Stores 643 409 342 411 959 532 626

Gasoline Stations 848 503 468 1,406 872 851 805 Clothing & Clothing Accessories Stores 729 262 787 227 598 197 405

Sporting Goods, Hobby, Book & Music Stores 455 158 382 469 338 268 303 General Merchandise Stores 6,479 959 3,235 3,325 1,812 1,854 2,156

Miscellaneous Store Retailers 372 154 578 776 388 302 357 Nonstore Retailers 5 36 1 150 75 48 53

Food Services & Drinking Places 1,622 826 1,198 1,305 1,593 964 1,204

Total $14,614 $7,736 $10,693 $18,259 $11,805 $10,507 $11,150

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 26

Leakage

As previously introduced, reported taxable sales can be evaluated in conjunction with population and income levels to predict whether an area has excess retail and is capturing more sales than would be expected, or not enough retail, and is experiencing a leakage of sales. Figure 10 below illustrates this evaluation for the County as a whole, and suggests that the County has more General Merchandise, Food, Building Materials, and Electronics & Appliance sales than would be expected. Further, the County has fewer Food Service

(Restaurant), Miscellaneous, Sporting Goods & Hobby, Clothing, Gasoline, Health & Personal Care, Furniture, and Motor Vehicle sales than would be expected. For reference, some Sporting Goods & Hobby and Clothing sales may be occurring at General Merchandise stores, and some Health & Personal Care sales may be occurring at General Merchandise stores and/or Food stores. Finally, Clothing, Sporting Goods & Hobby, are especially prone to leakage to e-commerce / online sales (please see Figure 1 on page 12 above).

Figure 10: Retail Sales Capture & Leakage – Entire County ($ Millions)

RETAIL MARKET & REDEVELOPMENT ANALYSIS – SELECT RETAIL CENTERS 27

Table 14 below illustrates a similar calculation as provided in Figure 10 above, however provides detail by unincorporated County and major city. Positive figures denote sales leakage, while negative figures denote sales capture. Key highlights are that the cities of Citrus Heights and Rancho Cordova are capturing more than their expected share of sales, the unincorporated County achieved $1.75 billion less sales volume than would be expected, and the County as a whole experienced approximately $2.64 billion less sales volume than would be expected. For reference, approximately $1.23 billion of the $2.64 billion is attributable to motor vehicle sales.

Possible explanations for the performance within the unincorporated County include losses to untaxed online sales, and leakage to competitive retail centers in incorporated areas of the County and/or outside the County that attract unincorporated County residents due to superior quality, retailer offerings, proximity, and/or ease of access.

Table 14: Unincorporated County & Major Cities Sales Leakage (Capture) ($ Millions)

Retail Category…