Global Research and Consulting Econometric Advisors CBRE Econometric Advisors Client Conference 2012 October 2, 2012 Session III | Technology and the Future of Retail vs. Wholesale Space Presented by: Abigail Rosenbaum, Senior Economist Jared Sullivan, Senior Economist

CBRE | Page 2 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 What is the Supply Chain? A supply chain consists of the activities and infrastructure whose purpose is to move products from where they are produced to where they are consumed. Source: Fundamentals of Supply Chain Theory.

CBRE | Page 3 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Extreme Supply Chain Alternatives  A totally “Flat” supply chain network: Chinese factories ship production directly to retailers who keep inventories on their retail shelves.  An extensively “Hierarchical” supply chain network: Overseas factories ship to a single national warehouse. From there to one of 10 regional warehouses. From there to the retailer.

CBRE | Page 4 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Supply Chain Decisions Involve of Five Key Areas ProductionInventoryLocationTransportationInformation

CBRE | Page 5 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Supply Chain-Why it Matters?  Supply Chain management accounted for nearly 10% of US GDP, over $1 trillion in  Supply Chain related activities can account for as much as 50% of the final price of a product.  Industrial real estate is heavily influenced by changes in the supply chain.

CBRE | Page 6 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Industrial Demand and Changes in Inventories are Highly Correlated Source: BEA, CBRE EA Industrial Outlook.

CBRE | Page 7 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Inventories-What Managers Must Consider Fixed Cost Cost to place an order regardless of size Purchase Cost The cost per unit to buy and ship inventory Stockout cost Cost of not having sufficient inventory to meet demand. Holding Costs Cost of keeping inventory on hand Bullwhip Effect Demand changes that cause a chain reaction leading to excess inventory and production capacity

CBRE | Page 8 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Inventories are Becoming a Smaller Share of Our Economy Source: BEA, CBRE Econometric Advisors

CBRE | Page 9 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 The IT Revolution Continues to have Impact Supply Chains…  3D production technologies speed up industrial design and production  Robots and new software have allowed for automated warehouses  IT has allowed companies to serve more customers with fewer inventories and employees Internet shopping has allowed firms to hold fewer inventories P&G has deployed technology allowing larger teams to be managed by fewer people Schwans is “right sizing” after 60 years of organic growth left its distribution system inflexible and inefficient

CBRE | Page 10 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Internet Sales: Share and Growth Continues to Accelerate Source: Census Bureau. Sales Growth (Yr/Yr)

CBRE | Page 11 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Breaking Down The E-Commerce Share By Segment Source: Census Bureau. Share of Sales (%)

CBRE | Page 12 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Cities With 30% Higher Broadband Access Have… Source: Census Bureau, CBRE Econometric Advisors.

CBRE | Page 13 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Absorption Shows Struggle in E-Commerce Era Source: CBRE Econometric Advisors.

CBRE | Page 14 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Retailing in 2025: What the Internet Does! Creates greater price competition between retailers. Competition lowers margins (and rents ?) Stores become smaller “display centers” where clients try, size, color items – which are then ordered-delivered. Big Box → Small Box Small stores allow retailers to disperse into local targeted areas rather than regional centers. Inventories move from retailer (back) to warehouses.

CBRE | Page 15 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Internet Effect: Downsizing Stores Average Store Size (Sqft X 1,000) Source: CBRE EA/Dodge Pipeline.

CBRE | Page 16 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Building Warehouse Space For E-Commerce RetailerSquare FeetLocation Macy’s1,300,000Washington, DC Saks564,000Nashville, TN Kohl’s951,000Dallas, TX Toys ‘R’ Us300,000Reno, NV Home Depot1,000,000Atlanta, GA Source: PNC.

CBRE | Page 17 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 E-Commerce Poses Challenges Not Just for Retailers Home Deliveries are Up UPS: Residential Deliveries Make up 40% of US volumes, compared to 20% in 2000 E-Commerce Sales Increasing “Last Mile” to Consumers Small Local Packages a Challenge to Deliver “Last Mile” Could be Up to 75% of Supply Chain Costs for UPS and FedEx Solutions???? Source: The Motley Fool.

CBRE | Page 18 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Inventories are Becoming a Smaller Share of Our Economy

CBRE | Page 19 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Location- Managers Must Consider Range of Factors Including Cost of FacilitiesCost of LaborSkills available within labor forceInfrastructure conditionsTaxes and regulationProximity to suppliers/customersTransportation costs

CBRE | Page 20 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 What Managers Must Consider For Industrial Real Estate Trade off between facility cost and customer service More facilities=higher facility costs, higher customer service, lower transportation costs Fewer facilities=lower facility costs, lower customer services, higher transportation costs Location Local infrastructure Proximity to customers, suppliers, UPS/FedEx

CBRE | Page 21 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 How Choice of Network is Determined Individual consumers? Large businesses? Internet based? Who are your customers and what do your orders look like? High value? Low value? Short shelf life? What are your products? Higher energy costs lead to increased incentive to reduce transportation costs ( e.g. train vs. truck) Energy costs

CBRE | Page 22 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Cities with UPS and FedEx Hubs to Benefit from Increased Internet Shopping

CBRE | Page 23 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Distribution Markets Will be Impacted Most by Supply Chain Changes Distribution markets are defined as markets where the share of distribution specific stock is greater than the national average. MarketDistribution Share (%) Riverside66.3 Nashville52.1 Minneapolis42.2 Memphis31.5 Dallas30.5 Atlanta24.3 Nation17.5 Baltimore4.7 Boston4.7 Detroit4.4 Washington, DC3.4 New York2.6 Cleveland2.2 Source: CBRE EA Industrial Outlook.

CBRE | Page 24 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 So What Does All This Mean to Real Estate? E-Commerce Effect on Brick and Mortar Smaller Store Size (Risks for Big Box/Power Centers) Lower Future Absorption Less Inventory in Stores, Shipping Directly from Warehouse Translates into a loss for Brick and Mortar and a gain for Warehouse But some of that gain is negated by more efficient supply chains Markets with Fedex/UPS hubs will benefit as more online retailers provide same day shipping