RETAIL NEWSLETTER

[PORTLAND, OR] [QUARTER ONE 2009]

RETAIL MARKET OVERVIEW
By Grant Norling
Oregon Retail Specialist – 503.542.5416
The Portland Metro commercial real estate market is
beginning to show signs of an economy adversely impacted
by recession. The office, industrial and retail sectors are
slipping and can no longer help buoy the economy which
has been drug down by the tanking residential market.
Without the ability to gaze into a crystal ball to predict the
future, it is hard to forecast when the overall real estate
market will hit bottom and when it will begin to crawl back
out. Don’t expect an inflection point for at least a few more
quarters even from the most optimistic perspective. Do
expect a vast amount more retailers to call it quits in the
The following table details changes in retail supply,
coming months as the aftermath of the grim holiday season
absorption and year-end vacancy over the past 10 years.
is sorted out. Some experts project that over 12,000 stores will
go dark across the US by year end. When the dust settles, this
recession will hopefully provide the road map to reinvent the
retail market in a way to generate sustainable growth.
Commitment to Values
SUPPLY, VACANCY & ABSORPTION
Retail supply, vacancy and absorption are analyzed using
the Norris, Beggs & Simpson Retail Market Report. As of the
end of the fourth quarter 2008, the total retail supply in the
Portland market was 43,178,907 SF of which 2,521,052 SF
was vacant, indicating a vacancy rate of 5.8%, up 90 basis
points from 4.9% one year ago. This shows a relatively high
vacancy rate from what the Portland market has
experienced in the past five years. This increase can be
largely attributed to the increase in vacant big box spaces
due to bankrupt national and regional retail chains.
Currently, the Portland market is experiencing a retail
vacancy rate that is slightly above the range typically
exhibited by healthy markets of 4 to 5%.
Portland Metro Retail Demand
Year Absorption (SF) Vacancy

The 2008 holiday shopping season was dismal and left many 1999 506,141 5.0%
retailers reeling in the already stagnant economy. The 2000 979,766 6.0%
International Council of Shopping Centers (ICSC) which tracks 2001 342,886 6.7%
retail sales volume shows that the holiday retail sales fell to a 2002 375,920 5.4%
low that hasn’t been touched in over 35 years. The outlook 2003 242,709 4.3%
for 2009 is bleak; unemployment has reached a high that
2004 2,461,489 4.3%
hasn’t been seen since 2003, rising to 9.0% in Oregon and
will rise higher. In reaction, retailers are slashing prices to 2005 808,981 4.7%
entice consumers that have expendable income to shop at 2006 46,584 4.8%
their stores. However, these are not a sustainable long-term 2007 1,100,000 4.9%
business practices. 2008 339,774 5.8%
With many big box retailers filing for bankruptcy, there is Total 9,476,332
increasing availability of unobstructed spaces available in Source: Norris Beggs & Simpson Retail Market Report
the marketplace. With the collapse of Wicks, Linens N Things,
The Portland retail market has achieved positive retail
and Circuit City, it has left an additional 1% vacancy in the
absorption each of the past 10 years, which is a positive
local Portland retail market alone. Many of these vacant
demand indicator. This trend is projected to abruptly reverse
spaces aren’t the appropriate size to accommodate the few
in the coming quarters as the market continues to soften.
active national retail tenants. A high level of incentives from
property owners will be required to attract willing tenants to The Portland market consists of seven general submarkets
lease the empty spaces. Likely incentive will either come with including: Central City, Sunset Corridor, Southwest, Eastside,
high tenant improvement funds or months of concessions or 122nd/Gresham, East Clackamas and Vancouver. Five of the
both. However with many national retail tenants taking a seven sub markets achieved positive year-to-date
conservative growth route and waiting out the uncertainty of absorption. Particularly strong submarkets include the East
the volatile financial markets; it is likely that a majority of Clackamas and Eastside, which have retail vacancy rates of
these vacancies will endure prolonged vacancy periods. 2.5% and 5.0% respectively. The 122nd/Gresham and Central

PGP VALUATION INC IS PROUD TO PARTNER WITH A WORLDWIDE AFFILIATION OF INDEPENDENTLY OWNED AND OPERATED REAL ESTATE SERVICES. THE POWERFUL PARTNERSHIP WITH
CMN ALLOWS PGP VALUATION TO OFFER ITS CLIENTS A VERY BROAD RANGE OF SERVICES AND RESOURCES IN MORE THAN 100 MARKETS AROUND THE WORLD.
Retail Newsletter Q1 2009 Portland OR
City submarkets cover the high end up the vacancy Since the early 2000s investors have looked for relatively safe
spectrum operating at 7.5% and 8.0% vacancy respectively. investment vehicles. With the stock markets slumping and
money markets erratic, many investors flocked towards real
The following table provides the estimated retail space per
estate investing. With property values on the rise it was a safe
capita (SF/Capita) for the Portland Metro area compared to
bet that any property they bought could be sold for a profit
Salem and nationally.
in five years. However with the recent softening of the
commercial market, the residential market six months prior to
Retail Supply/Capita that, and the CMBS market evaporating overnight; it has left
Catergory SF/Capita many participants at risk of being upside down in their
Portland Metro 28 investments. The previous five years of a bull real estate
Salem 41 market peaked and we are now in the midst of a bear
National Low 22 market. Investors are being less hasty with their money and
National High 74 are searching for the best deals they can find.
National Average 44
Source: CoStar Property ® CAPITALIZATION (CAP) RATES
Portland ranks as the third lowest retail supply per capita The following table shows historical CAP rate trends in Oregon
according to CoStar. This positions Portland well to bear for the past several years. The average CAP rate for all
tough economic times and is evidence that the Portland centers rose from 6.8% during 2007 to 6.9% in 2008; a
market is not overbuilt with retail like many major US markets. nominal change; however, a telling sign of the times to
Presently, it is easier to appreciate the insolating impact that come. Increased vacancies will likely push CAP rates higher
the UGB and stringent zoning have on the region, rather than in the coming year as investors take a more conservative
focus on the obstacles they present to sustained growth. approach for non-stabilized properties and are faced with
.
higher costs for loan dollars, which will require reduced prices
COMMERCIAL & RETAIL SALES to maintain modest cash-on-cash returns.
Nationally commercial property sales decreased by almost
two-thirds; dropping from $450 billion in 2007 to below $150
billion in 2008 according to Real Capital Analytics.1
Retail CAP Rates - OR
Furthermore their data reveals that retail sector sales volume Type of Average
dropped from $75 billion in 2007 to just over $20 billion at Year Center CAP Rate Range CAP Rate
the close of 2008. Looking forward to 2009; the market
shouldn’t be much different. A close look at the Portland 2002 Strip 8.3 - 10.8% 9.6%
market retail sales volume for 2008 reveals it’s nearly half of Anchored 7.9 - 9.5% 8.9%
what it was at the close of 2007. The chart below summarizes All Centers 7.9 - 10.8% 9.2%
some of the sales from 2008 and breaks them down into 2003 Strip 8.0 - 9.6% 8.8%
three categories; Anchored, Strip and Other (triple net, fast
Anchored 7.0 - 9.5% 8.7%
food, freestanding, etc).
All Centers 7.9 - 9.6% 8.7%
2008 Investment Retail Sales - Oregon 2004 Strip 6.5 - 8.9% 7.6%
Category Anchored Strip Other* Anchored 7.0 - 9.4% 7.6%
Size All Centers 6.5 - 9.4% 7.6%
Low 40,800 12,000 1,690
High 78,292 27,710 14,820 2005 Strip 6.4 - 7.8% 7.1%
Average 53,306 16,465 5,264 Anchored 5.9 - 8.6% 7.2%
Sale Price All Centers 5.9 - 8.6% 7.1%
Low $6,925,000 $1,575,000 $625,000 2006 Strip 5.5 - 10.1% 6.9%
High $16,762,867 $6,200,000 $7,300,000 Anchored 5.7 - 7.7% 6.7%
Average $12,165,717 $4,018,250 $2,607,479 All Centers 5.5 - 10.1% 6.8%
Sale Price/SF
Low $170 $131 $191 2007 Strip 5.8 - 8.1% 6.8%
High $322 $347 $835 Anchored 6.2 - 7.3% 6.7%
Average $226 $248 $528 All Centers 5.8 - 8.1% 6.8%
Cap Rates
Low 6.5% 6.5% 6.0% 2008 Strip 6.5 - 7.0% 6.7%
High 7.6% 7.0% 8.5% Anchored 6.5 - 7.6% 7.0%
Average 7.0% 6.7% 7.2% All Centers 6.5 - 7.6% 6.9%
Source: PGP Valuation, Inc. Database *Fast food, freestanding & NNN Source: PGP Valuation, Inc. Database

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. Real Capit al Analytics – Capital Tends Monthly – 2008 (www.rcanalytics.com)
Retail Newsletter Q1 2009 Portland OR
CAP rates in Oregon trended downward for several years; THE BIGGEST LOSERS OF 2008
however, they stabilized (2006-07) and have trended upward
slightly in the past year due to the credit crisis and increased Banks are getting a handout from the government for every
investment risk in today’s economy. Interviews with sales bad investment decision they made and retailers are being
brokers familiar with both local and national real estate left to bare the burden of a sour economy. It’s inevitable for
investments indicate that CAP rates and corresponding the strongest retailers to survive and those who were too
values within the Pacific NW region are holding strong relative aggressive with their business model being forced into
to other regions. However, this might be a lag effect similar bankruptcy court to settle their now troubled assets; causing
to the one seen in our housing markets. tens of thousands of jobs to be lost in the mean time. Here is
a list of the biggest losers in the retail world.
Several factors contribute to the relatively strong commercial
real estate fundamentals in the Pacific NW region: (1)
Losers of 2008
stringent zoning and scarcity of developable commercial
sites create a barrier to entry for new development; (2) stable Walgreens Circuit City Wilson Leather
supply/demand conditions (vacancy levels) insolate existing Walmart Linens 'N Things Sharper Image
development and ensure that market rent levels at minimum Lowes Wicks Levitz
match inflation; (3) very few prime investment properties are JC Penny Macys Gottschalks
available for sale, while demand from local, regional and Best Buy KB Toys Wilson Leather
national investors is still relatively strong in this marketplace; Winco Mervyns Blockbuster
and (4) the relationship between NOI and value (CAP rates)
have remained in balance relative to other regions. Even the
McDonalds Shoe Pavillion Hollywood Video
best markets with the most ideal fundamentals are primed
for correction in a slumping global economy.
UNEMPLOYMENT, WHEN WILL IT PEAK?
Many retailers may have had a slow year, but some should
Unemployment is on its way up as recession breeds job count their blessings as they hold on. Those who have
losses. Oregon has the 6th highest unemployment rate in the announced major bankruptcies or store closings are
US as of December. The national average is at 7.2% and summarized in the following table with the number of store
Oregon is almost two hundred basis points higher at 9.0%. closings nationally listed on the right.
Some of our neighbors have slightly higher unemployment,
with Nevada at 9.1% and California at 9.3%. Expect Retailer Status Stores Closed
unemployment to rise with the number of retailers and major
employers downsizing or declaring bankruptcy. President Ann Taylor Re-Structuring 117
Obama is working towards an economic stimulus program to Banana Republic Re-Structuring 25
help combat the high unemployment; however, it could Circuit City Chapter 11 721
take several months before any relief is created by this Disney Stores Chapter 11 98
program. Some economist are doubtful of the long-term Foot Locker Re-Structuring 60
benefits than can be provided by any stimulus package. Linens 'N Things Chapter 11 371
Below is a graph that charts unemployment in Oregon and in Macy's Re-Structuring 11
the United States as it has been on the rise in the past year. Mervyn's Chapter 7 149
Pacific Sunware Re-Structuring 154
Unemployment 2008 Phillips-Van Heusen Re-Structuring 175
Sharper Image Chapter 11 96
Oregon United States
Starbucks Re-Structuring 600
10% Wilson's Leather Chapter 11 103
9% Zales Jewelers Re-Structuring 105

8% Forecasting
7% The Rivers at Oregon City is a proposed 64 acre shopping
center to be constructed at the intersection of I-205 and Hwy
6% 213. It will sit adjacent to Home Depot and will be anchored
5% by a Target and a Regal Cinema. Sub-anchors include Best
Buy, Staples, Bed Bath & Beyond, and Dicks Sporting Goods.
4% Total retail building square feet is projected to come to have
January April July October over 706,000 SF

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Retail Newsletter Q1 2009 Portland OR
THE DOWNFALL OF THE BIG BOX?
PGP VALUATION INC IS A REAL ESTATE APPRAISAL CONSULTING Linens N’ Things and Circuit City will soon account for over
FIRM. ESTABLISHED IN 1978 IN PORTLAND, OREGON, AND HAS 1000 stores across the United States to go dark and are
GROWN TO BECOME ONE OF THE LARGEST COMMERCIAL pushing vacancy rates up. In addition, numerous retailers are
VALUATION FIRMS IN THE COUNTRY. slowing expansions due to consumers cutting back on
spending and demand for these big boxes is diminishing.
PGP VALUATION INC IS PROUD TO PARTNER WITH COLLIERS These spaces are large; from 35,000 SF to over 100,000 SF;
INTERNATIONAL, A WORLDWIDE AFFILIATION OF INDEPENDENTLY with lot sizes typically above three acres. Below is a rundown
OWNED AND OPERATED REAL ESTATE SERVICES. COLLIERS WAS of the recent big box spaces in the Portland Metro market
AMONG THE FIRST COMMERCIAL REAL ESTATE ORGANIZATIONS that have gone dark and remain vacant. These vacancies
TO RECOGNIZE THE IMPORTANCE OF LOCAL KNOWLEDGE ON A represent roughly 1% of the total 42 million SF of space in the
GLOBAL SCALE, AND TO PROVIDE CONSISTENT, SUPERIOR Portland Metro market area.
SERVICE IN MULTIPLE LOCATIONS.
Vacant Box Spaces
THE POWERFUL PARTNERSHIP WITH COLLIERS ALLOWS PGP Former Tenant City Sq. Ft.
VALUATION TO OFFER ITS CLIENTS A VERY BROAD RANGE OF
Mervyns Vancouver 82,225
SERVICES AND RESOURCES IN MORE THAN 100 MARKETS
AROUND THE WORLD. Linens N' Things Portland 40,160
Linens N' Things Portland 35,000
FOUNDED IN 1978 BY THREE OF THE BIGGEST NAMES IN THE
Linens N' Things Beaverton 45,000
BUSINESS, DAVE PIETKA, DON PALMER, AND DAVE GROTH,
PGP VALUATION HAS GROWN TO BECOME AN INTERNATIONAL Linens N' Things Tanasbourne 38,410
FIRM WITH 250 ASSOCIATES IN THREE COUNTRIES. Levitz Clackamas 34,103
Levitz Tigard 40,041
OFFICES LOCATED IN:
Wickes Jantzen Beach 51,350
UNITED STATES Shoe Pavilion Portland 17,505
BOISE, BOSTON, CARLSBAD, CHICAGO, COLUMBUS, DALLAS,
Shoe Pavilion Jantzen Beach 19,909
DENVER, HONOLULU, IRVINE, LOS ANGELES, PORTLAND,
PHOENIX, ROSEVILLE, SAN DIEGO, SAN FRANCISCO & SEATTLE Shoe Pavilion Beaverton 16,500
Total 420,203
CANADA
Source: New & Neville Real Estate Services
CALGARY, EDMONTON, HALIFAX, TORONTO, VANCOUVER
Circuit City lost its battle with the recession and was forced
GRANT NORLING HAS BEEN SERVING THE OREGON MARKET into chapter 11 even after the initial closing of 155 poorly
OVER THE PAST EIGHT YEARS AT PGP VALUATION AND HAS performing stores across the Midwest. With a lackluster
DEVELOPED A SPECIALTY TEAM FOR APPRAISING RETAIL showing of buyers to purchase existing leases and bleeding
PROPERTIES INCLUDING SINGLE-TENANT capital at the seams; no other choices were left but to close
TRIPLE NET, STRIP, NEIGHBORHOOD, the remaining 567 stores and liquidate all assets. Circuit City
COMMUNITY AND SUB-REGIONAL is planning on having all of its stores liquidated by the end of
CENTERS. HIS TEAM ALSO WORKS March which leaves four stores in Portland and one store in
ON A VARIETY OF OTHER PROPERTY
Salem going dark before the start of the second quarter. The
following chart breaks down each of these buildings and
TYPES INCLUDING: DENTAL CLINICS,
vacant square footage that they will leave for in the market.
MEDICAL OFFICES, MIXED-USE CENTERS,
SELF-STORAGE, MOBILE HOME PARKS Vacant Box Spaces
AND HOTELS/MOTELS. CONTACT HIM Former Tenant Location Sq. Ft.
BY PHONE OR EMAIL LISTED BELOW.
Circuit City Gateway 37,857
Circuit City Jantzen Beach 37,360
W. GRANT NORLING Circuit City Washington Square ±37,000
MANAGING DIRECTOR - PORTLAND RETAIL
503.542.5416 Circuit City Clackamas ±37,000
GRANT.NORLING@PGPINC.COM
Circuit City Salem ±37,000
PGP VALUATION INC Total 186,217
110 SW YAMHILL STREET, SUITE 200 Source: CoStar®
PORTLAND OREGON 97204-3024
WWW.PGPINC .COM

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. Real________________________________
Capit al Analytics – Capital Tends Monthly – 2008 (www.rcanalytics.com)