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News release

New York, NY

Lack of Product Spurs Demand in Retail Investment Sales Sector According to Jones Lang LaSalle’s 2011 Retail Outlook

“B” and “C” assets increasingly in demand; REITs desperate to deploy capital


NEW YORK, Dec. 6, 2010–As consumers ease up on the spending brakes this holiday season and retailers ring up stronger holiday sales, retail real estate fundamentals are approaching bottom with occupancy expected to improve in 2011. Increased consumer buying power is expected to lead to greater sales and profits for retailers, and renewed demand for store space in malls and shopping centers will further strengthen the retail leasing market and ultimately, the retail investment sales market.  These stronger fundamentals are fueling new interest in the retail investment markets and a lack of product on the market is creating fierce competition among both core buyers looking for quality assets and opportunistic investors seeking distressed product, according to Jones Lang LaSalle’s 2011 Retail Outlook. 
 
Sales of significant retail properties totaled $13.9 billion through October of this year, representing a 62 percent increase over the $8.9 billion of sales during the same period in 2009.  Cap rates continue to decline and positively impact retail values.  Cap rates are as low as six percent for Class A trophy assets and range to 10+ percent for non-core distressed shopping centers.  Average closed cap rates are approximately eight percent and declining, which is a trend that should drive institutional owners to put quality retail properties on the market for sale.
 
“More realistic seller expectations combined with pent-up demand is manifesting as a strong pipeline of closed transactions in the fourth quarter,” said Kris Cooper, Managing Director of Jones Lang LaSalle’s retail investment sales practice.  “The number one asset sought by retail investors remains Class A core grocery-anchored product, however, in the last 45 days we’ve seen a marked uptick in interest in B and C products.  We haven’t seen the B or C market move for two to three years, and today they’re getting investor attention. The return of banks and CMBS lenders to the capital markets will increase velocity in this sector and we expect to see more sales of this asset class as early as the first quarter of 2011.”
 
Added Margaret Caldwell, Managing Director of Jones Lang LaSalle’s retail investment sales practice, “The decline of cap rates to near historic lows may be pushing more institutional owners to consider selling core assets, but in some cases, the net operating income has deteriorated and potential sellers cannot recover their initial investment.  We’d definitely be seeing more sellers if this were not the case.”
 
Sales of distressed assets also remain strong, though not at a robust level expected by the market. Buyers of this type of product have predominantly consisted of private entrepreneurial groups willing to pay all cash.  Lenders, however, are hesitant to commit to even low-leveraged loans in this space.
A lack of new supply is challenging retailers and operators from meeting their growth models.  With consumer confidence up from the lows of 2009, national retailers are aggressively trying to expand to gain market share, but that’s proving difficult given the lack of acquisition opportunities or new supply for expansion options.  At the end of 2009, U.S. Retail REITs had record cash on hand of $17 billion and a lot of opportunity to invest.
 

Source: Bloomberg, Jones Lang LaSalle

Fund-raising continued in 2010 and retail REITs in the United States are on pace to raise $10 billion in capital through the debt and equity markets this year, which will be the most capital raised in recent record.
 
 
Source: Bloomberg, Jones Lang LaSalle; 2010 data through 11/17; Total 2010 issuance may exceed $10 billion
 
With pressure to expand and limited opportunities, REITs are looking at new development and opportunistic, turnaround opportunities.  The improving economy has lifted demand for existing real estate, as well as many development projects that were halted during the recession.
 
While consumer confidence is higher than it was during the peek of the recession, many consumers are still waiting on fundamentals to improve.  Continued job growth and a healthier stock market will stimulate consumer spending, and wages are also an important factor. 
 
“We saw a strong Black Friday and expect holiday sales to increase four to five percent vs. the two to three percent originally predicted.  Shoppers are tired of being conservative – they want to spend money this holiday season and Black Friday and Cyber Monday sales have proven this inclination,” said Greg Maloney, CEO and President of Jones Lang LaSalle Retail.  “In 2011, we’ll see landlords and retailers continuing to be creative at filling vacant space—including pop-up stores, temporary leasing of in-line spaces, nonprofits and incubator tenants.  Retailers that have a strong 2010 will come out swinging with expansion in 2011.  While we don’t expect any new developments in 2011, we do expect the development process to start this year with expected deliveries in 2012 or 2013.”
 
Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for its clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In the last three years, Jones Lang LaSalle Capital Markets completed more than $143 billion transactions globally. The firm’s Capital Markets team comprises approximately 1,500 specialists, operating in 180 major markets worldwide.
 
About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2009 global revenue of $2.5 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.6 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with approximately $40 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.