WEEKLY MARKET RECAP

February 14 February 29, 2012

By KC Conway, MAI, CRE

KC.Conway@Colliers.com

MACRO ECONOMIC & R.E. NEWS OF THE WEEK

Thank you for your understanding while the Weekly Market Recap was idled the past two weeks. As you know, I had planned a week respite due to my schedule at the Mortgage th th Bankers Association (MBA) conference February 5 to 8 , and subsequent travel to Washington D.C. and the International Council of Shopping Centers (ICSC) Idea Exchange in Florida. Subsequently, I had some illness that required a little down time. I am recovered and anxious to review with you a mountain of information from numerous industry events and refreshed economic data. Where to begin, and how to characterize all that has transpired in the past couple of weeks, was the challenge to starting this Weekly Market Recap (WMR). Fortunately, I needed only look a couple slides deep into my most recent presentations for the answer. The theme to my presentations of late has been: Brake & Throttle: Where is the friction and acceleration in the economy and real estate? At the onset of these recent presentations, I have asked the question: Does the start of 2012 not seem eerily similar to the start of 2011? The ADP, BLS, ISM and consumer confidence data for January and February 2012 has come in just as bullish as it did in January 2011. So, why has there not been the same kind of market response that existed in January 2011? The answer, in my opinion, is that the market recalls that Stuff Happens - my technical economic term for 2012. What was the stuff that happened in 2011 that derailed GDP? In March 2011, we had the Sendai earthquake. That event was then followed by the debt debacle in Washington D.C. that led to the U.S. debt downgrade in August. And, in the Fall, we had the onset of the European debt crisis. The market has also become more familiar with the nuances in the government data, like Weekly Jobless Claims and Unemployment. No longer does the market accept these figures at face value. In other words, the market clearly realizes that not all is as it seems. An unemployment rate that declines because of a change in the labor participation rate, versus an actual increase in hiring, is just one good example that has led to the market adopting the philosophy: Treat government data like wine. Let it age before you partake of it. For veteran WMR readers, you know that following the moving-average trend and noting the revisions are essential

to unlocking what is really occurring behind the scene for metrics, such as employment, housing and GDP. If a natural disaster thousands of miles offshore from the U.S., and a pair of man-made disasters in Washington D.C. and Greece could derail the early 2011 bullish market, what is the stuff that can happen in 2012 to derail the sustainability of another bullish start? The rating agencies have given us one clue sovereign debt downgrades. Can the U.S. escape yet another debt downgrade with its untamed deficit spending? I think not. It may be prudent to factor in another U.S. debt downgrade prior to the late Summer political party conventions into your Stuff Happens risk management model. Its better to be prepared. Energy and commodity inflation is a second Stuff Happens event that can deflate the recent rise in consumer confidence and reverse the improving trend in both GDP and corporate earnings. With gasoline prices now at the highest level they have ever been during the Winter months, it is not farfetched to anticipate $5.00 per gallon gasoline prices this Summer. And, we have this little event - the presidential and national elections - in November. Why should our capital intensive industry care so much about the 2012 national elections? The political party in power in January 2013 will be in a position to appoint the equivalent of the financial supreme court. The FDIC is operating with an interim chairperson (Martin Gruenberg), and the Federal Reserve Chairman (Ben Bernanke) term expires at the end of 2013. How these and other financial-sector vacancies are filled will determine the future course of U.S. fiscal policy, interest rates and financial regulation. Will it be M.O.T.S (more of the same), and the U.S. following the path of every failed Fiat currency dating back to the first century and Roman Empire when Emperor Nero began to reduce the silver content of the denarius, or the tenth century when paper currency was introduced in China during the Song Dynasty with the representation that it could be exchanged for gold, silver or silk? If you want a great quick read on the history and dangers of Fiat currencies, read John Lifflanders How International Monetary Trends Affect Real Estate Values.

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THE SCOREBOARD:

to the S&P/University of Michigan Consumer Sentiment Survey, is based on a probability-design random sample conducted by the Nielsen Company. Chicago FED National Activity Index: According to the Chicago FEDs press release, the Chicago FED National Activity Index decreased to +0.22 in January from +0.54 in December, but remained positive for the second straight month for the first time in a year. Three of the four broad categories of indicators that make up the index improved from December, and only the consumption and housing categorys contribution was negative in January. The indexs three-month moving average, CFNAI-MA3, reached its highest level since March 2011. It increased from +0.06 in December to +0.14 in January. This latest CFNAIMA3 suggests that growth in national economic activity was slightly above its historical trend.

For the month of February, the WMR Scoreboard shows the Bulls and Bewildered tied 5-5. The year-to-date 2012 score, though, still has a slight edge to the Bulls with a 5.8-5.0 Bulls/Bewildered score. As the first quarter unfolds, and we observe more contradictory housing, retail, and manufacturing data due to the processing of foreclosures, accounting for discounting in holiday sales, and the expiration of tax incentives for capital spending, it is more likely that the Bewildered will be the lead score in March. Things are not as they appear in the current data. Digging beneath the surface to understand the why is critical to not misinterpreting, for instance, an increase in Pending Home Sales, or a decline in Durable Goods Orders both of which just occurred.

Standout Statistics for February 14th to 29th:

Before launching into the numbers, some context might be helpful. Recently, I rediscovered a book from my late father that he gave me in 1989 on the occasion of earning my MAI (Member Appraisal Institute) appraisal designation. This book has provided me with what I believe is the antidote to magical government math, Dodd-Frank bank regulation, and so much of what confounds us in our country today. The book is A Cowboys Guide to Life by Texas Bix Bender. You are forewarned that some Texas Bix Binder advice is likely to appear in future WMRs. The Texas Bix Binder quote that aided me in culling down the Standout Statistics for this WMR is: Its best to keep your troubles pretty much to yourself, cause half the people youd tell em to wont give a damn, and the other half will be glad to hear youve got em. I will strive to keep those troubling statistics that dont mean a bleep to you out of the WMR. So what are the standout statistics that you should give a Texas Bix Binder about? The leading Bullish standout statistics were: Consumer Confidence: The Conference Board Consumer Confidence Index , which had decreased in January, increased in February. The Index now stands at 70.8 (1985=100), up from 61.5 in January. It is also noteworthy that both the Present Situation Index (increased to 45.0 from 38.8) and the Expectations Index (improved to 88.0 from 76.7 in January) rose. The monthly Consumer Confidence Survey , in contrast Retail Sales: On February 14 , the U.S. Census Bureau announced that advance estimates of U.S. retail and food services sales for January were $401.4 billion, an increase of 0.4 percent from the previous month and 5.8 percent above January 2011. Total sales for the November 2011 through January 2012 period were up 6.3 percent from the same period a year ago. The November to December 2011 percent change was revised from +0.1 percent to virtually unchanged. Retail trade sales were up 0.4 percent from December 2011 and 5.5 percent above last year. Food Services and drinking places sales were up 8.2 percent from January 2011 (recall this increase later in the WMR when I share some observations from the ICSC), and building material and garden equipment and supplies dealers were up 8.1 percent from last year. That is the factual recitation of retail Page | 2
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sales, but what does it all mean? Fortunately, Colliers own Ann Natunewicz has just released her Q1 2012 Retail Highlights report. Her take on the retail sales data and outlook for 2012 is as follows: Q1 2012 Retail Highlights: Ann T. Natunewicz Manager, Retail Research | USA As expected, incessant promotional activity, led by Internet retailers, defined Holiday 2011. Depending on the forecaster and specific time period covered, holiday sales rose anywhere from 3.3% to 4.1% year-over-year: solid numbers but slightly behind 2010. ComScore reported that during November and December, online shoppers spent nearly $37.2 billion, up 15% from the approximately $32.4 billion spent in 2010. Many retailers sacrificed margins to capture revenue and market share from competitors. They have begun to confirm, in their Q4 earnings reporting, how that decision (combined with extended operating hours) hurt profits. Despite increases in topline retail sales, underlying trends portend continued consumer weakness and caution in 2012. Weekly Jobless Claims: The claims for the period th ending February 18 were unchanged from the prior week, and the 4-week average remains in a range of 350,000 to 370,000 claims. Why are claims staying below the 400,000 level and less volatile than 2011? Some of the noise in this data is being worked out of the numbers as we gain distance from things like the post holiday layoffs. And, after three years of elevated layoffs, companies have reduced staffs to about as lean a level as they can to sustain operations. In other words, there are not too many more cuts that companies can make without adversely impacting operations. Weekly Jobless Claims as a key economic metric will lose its importance in 2012 as a leading indicator to metrics like average hours worked as we look to see if businesses feel confident enough to restart hiring. Just as it is time to re-adjust our perceptions of markets its time to adjust what indicators to place reliance upon as we shift our focus from: Are we in a recovery; to how robust is this recovery? Weekly Jobless Claims

estimates of GDP. The final estimate for Q4 2011 GDP will come at the end of March. In the interim, it appears that Q4 economic activity, led by manufacturing, was more robust in areas like auto sales and manufacturing. st 1 Revision to GDP

Advance Estimate of GDP from January

The word likely is misspelled in the graphic above The leading Bearish standout statistics were: Bank Failures: This February leap-year brought no relief to bank failures. Two more banks were closed on the final Friday in February. 2012 Bank Failures: 12 YTD Vs 20 for Jan-Feb 2011
Georgia leads with 3 failures followed by FL & TN

The bank failure count for 2012 has now risen to 12 with Georgia regaining the top spot again. Someone needs to explain to the bank regulators in Georgia that bank failures are not a sport in the SEC - and that it is not an area to be top-ranked. As I noted in January WMRs, bank failures are going to be with us through 2012 and likely 2013 if Dodd-Frank is fully implemented and remains punitive to community banks. Inflation (PPI and CPI): Inflation is creeping back into the vocabulary of manufacturers and consumers; and it is starting to register as a concern again in the governments two primary gauges of inflation: i) Producer Price Index (PPI); and ii) Consumer Price Index (CPI). Energy prices have caused material volatility in these two indices over the past year as oil prices have fluctuated from approximately $80 per barrel to $110. The latest PPI and CPI data suggests: Page | 3

Upward Revision to Q4 GDP: The Department of Commerces second stab at Q4 2011 GDP was revised upward from 2.8 percent to 3.0 percent. This upward revision caught me by surprise yes, I can miss one every now and then. As the bias in the Advance estimates by the Commerce Department has been to overstate GDP the past few years, we have come to expect downward revisions in the second and final

i. Higher energy prices are the main culprit for the uptick in both indices. As a result of the higher energy and oil prices, Crude Goods prices increased 1.5 percent in January - the second highest rate since April 2011. ii. Higher energy prices are appearing first in the cost of crude goods (up 1.5%). iii. Manufacturers are finding it difficult to pass along the increases to consumers as finished goods prices are up only 0.1 percent.
Producer Price Index: January 2011 - January 2012

consumers certainly are on watch to implement their defer capital and unnecessary spending plan. Home Prices: In recent presentations I have a picture of a martini glass as my graphic for housing.

The notation beneath it reads: Lets just have a drink and not talk about housing. Prior to the MBA conference, the Federal Housing Finance Authority (FHFA) released its latest home price data. Their latest figures on home prices revealed that for the 12 months ending in November, U.S. prices fell 1.8 percent. The FHFA index is now 18.8 percent below its April 2007 peak and roughly the same as the February 2004 index. Last week, S&P/Case Shiller released their latest figures for home prices. Their refreshed data is consistent with the FHFA figures, and my martini suggestion. Caseth Shiller reported February 28 that: All three headline composites ended 2011 at new index lows. The national composite fell by 3.8% during the fourth quarter of 2011 and was down 4.0% versus the fourth quarter of 2010. Both the 10- and 20-City Composites fell by 1.1 % in December over November, and posted annual returns of -3.9% and -4.0% versus December 2010, respectively. These are worse than the -3.8% and -4.0% respective annual rates both reported for November and Q4 2011. With this latest data, all three composites are at their lowest levels since the housing crisis began in mid-2006. S&P/Case-Shiller Home Price Indices December 2012

Consumer Price Index: January 2011-January 2012

The rise in oil prices back above $100 per barrel, and rise in gasoline prices to their highest level on record for the month of February, threatens to erode corporate profits and consumer confidence in 2H2012. Although the FED may not be on inflation-watch, businesses and Page | 4

The leading Bewildering standout statistics were: There are a couple Bewildering economic measures that warrant some discussion to avoid misinterpretation. For those following the housing and manufacturing sectors, more specifically Housing Sales and Durable Goods, last weeks data would lead one to believe: Homes are selling at a brisk pace once again; and that housing is recovering based on the rise in Pending Home Sales; and Manufacturing is stalling-out with the decline in Durable Goods. Housing and Home Sales: The data by the National Association of Realtors (NAR) and the Census Bureau pertaining to housing starts, new home sales, existing home sales and pending home sales is going to be volatile for at least the next two years. Variables, like the availability of credit, FHFA decision to explore bulk sales of foreclosures to investors, banks opting to accelerate short-sale programs over foreclosure actions, and even weather will influence these key housing metrics. Going forward it will be more important than ever to understand the why to the change in these housing demand metrics. Pending Home Sales, which have spiked several times over the past 18 months including last week, are running into appraisal and mortgage approval headwinds. Approximately one-third of all pending home sale contracts fall-out because of a mortgage denial due to credit issues, and another 25 percent result in a cancelation due to an appraisal problem. In other words, nearly 60 percent of all Pending Home Sales are resulting in a cancellation due to credit or appraisal problems. Focusing on the cancellation metric, more than the Pending Home Sales metric, will result in a better interpretation of whether more homes are being sold. New Home Sales can rise sharply as a percentage because the volume of new home construction is so low (about 20 percent of the peak 2005-2007 levels); and existing home sales can spike and fall based on foreclosure and short-sale behavior by the banks. The housing metrics are going to be all over the board in 2012. My best analysis on housing is as follows: i. Housing will recover first where job growth reestablishes (the no-brainer observation). Monitor job growth more than new or existing home sales data as those can rise and fall based on bulk foreclosure sales by FHFA. That means that a lot of secondary markets where manufacturing and agriculture are strong will be where there is demand for new homes. ii. Non-Judicial Foreclosure states (like Georgia) will recover faster than Judicial Foreclosure states (like Florida) as the excess inventory is moving more quickly from the banks and into the hands of investors where the housing units are being rehabilitated and returned to the market as rental inventory. Nearly 50 percent of the homes in foreclosure in Judicial Foreclosure states have not paid a mortgage in two years, according to the most recent LPS data. And,

these homes face protracted legal hurdles to be returned to the market for re-utilization and price discovery. iii. Focus on absolute figures with historical context versus ratios and percentage changes. Housing is recovering from such a low that YoY comparisons on a percentage basis can be misleading. Until we see new home construction (single and multifamily) approaching an 800,000 unit level again, housing will be a drain on the economy. Recall that we built 1.8 million housing units per year 2004-2007 when we only needed 800,000 per year. iv. And, the number of doubled-up households is the best leading indicator of future housing demand once job creation north of 250,000 jobs per month reestablishes. Currently, the U.S. has 28 million doubled-up households (Census Bureau), and 22 million of those households involve Americans over the age of 34 with children. Compared to a consensus figure of 8.0 million excess homes (vacant and forsale, foreclosed/REO, and foreclosures in process), the U.S. is going to be 6 million housing units short once unemployment falls back to a 6.0% range. That will be the point when home prices recover and housing starts spike. It will also likely be the end of this historic period of housing affordability. My optimistic guess at that date is 2014, and my pessimistic estimate is 2016. Do you now see why I have the martini glass recommendation for housing? Manufacturing and Durable Goods: The latest Durable Goods data released last week by the Commerce Department suggested that manufacturing is th slowing. The January report, released February 28 , showed that new orders for manufactured durable goods decreased $8.6 billion or 4.0 percent to $206.1 billion. The January decrease follows three consecutive monthly increases. Because Januarys Durable Goods orders was the largest drop in three years, and declined even when? excluding transportation (-3.2%) and defense new orders (-4.5%), analysts and the market immediately assumed manufacturing was slowing. Time-out was my reaction. What happened? The Durable Goods data does not reconcile with strong auto sales (now on track for maybe 15 million units in 2012 versus 13 million) or all other manufacturing indices, such as the Dallas, Kansas City, Empire State or ISM reports. What happened was the expiration of a tax incentive allowing full depreciation on equipment purchases at the end of 2011 that brought 2012 orders forward into 2011 just as Cash for Clunkers brought auto sales forward in 2009. Manufacturing is not falling back into recession, yet.

STATISTIC, QUOTE, & HEADLINE of the week: The Statistic(s) of the Week:
This weeks statistic of the week relates back to a Stuff Happens issue gasoline prices. As most of us clearly Page | 5

understand from having visited a gasoline station in the past two weeks, gasoline prices are rising. The recent increase in prices during an election year has sparked politicians to proffer all kinds of feel-good relief measures ranging from releasing petroleum from the Strategic Reserve to temporarily eliminating state and federal gasoline taxes. While these tactics may provide some temporary relief to the consumer until election-day, how do either: i. Address the problem that there is an increasing imbalance with global oil supply and demand? The world consumes 85 million barrels of oil per day while producing just 87 million barrels? That 2 million barrel per day margin is inadequate to absorb any kind of supply disruption like a hurricane in the Gulf of Mexico or the closing of the Strait of Hormuz by Iran? ii. Resolve that the U.S. lacks a comprehensive energy policy to meet our growing energy needs at a time when Asia and the emerging markets are also demanding more energy and oil to fuel their growth? iii. Not exacerbate the funding shortfall to repair and rebuild our aging roadway infrastructure? Gasoline Taxes: A look at the gasoline tax might be an appropriate item for the Statistic of the Week. Where to start? First, lets look at where the gasoline tax began. We owe it all to Oregon for starting this whole notion of a gasoline tax. The first US state tax on fuel was introduced in February 1919 in Oregon. It was a 1/gal tax. In the following decade, all of the U.S. states (48 at the time), along with the District of Columbia, introduced a gasoline tax. By 1939, an average tax of 3.8/gal of fuel was levied by the individual states. For those states with ballot initiatives this November to add just a penny tax to something, reflect on how these 1 taxes morph into monstrous revenue streams that feed politicians addictions to spend, spend, spend. Second, lets examine how much petroleum and gasoline prices have risen from a historical perspective. For this view I found an excellent recent Chart of the Day analysis.

increased by over $30. With oil prices trending higher, it is not all that surprising to find that gasoline prices are following suit. The average US price for a gallon of unleaded is up $1.87 per gallon since the financial crisis low. Over the past two months, gasoline prices have resumed their upward trend with an increase of $0.35 per gallon. And, finally, lets look at who really has the highest and lowest gasoline taxes by state. Why? The cost of fuel is becoming a material factor in the decisions corporations make in where they locate or expand operations. It is also elevating the value and importance of intermodal transportation networks so that manufacturers and corporations can maximize transportation cost efficiencies. Those MSAs and states with these transportation networks that can maximize use of rail and waterway movement of goods will be the winners with respect to job creation and demand for real estate. That is the linkage for WMR readers involved in the development, investment or finance of CRE. 10 States with the Highest Gas Taxes

10 States with the Lowest Gas Taxes

What the above chart depicts quite simply is that the price of crude oil continues to trend higher. Since the end of last September, the cost of one barrel of crude oil has Page | 6

The Quote of the Week:

Believe it or not, I just did not find any great quotes, or at least any that I could slip past Colliers public affairs review of this weeks WMR. As a result, I thought it might be more valuable to share some key takeaways from recent events, such as the MBA and ICSC Idea Exchange in west Florida. 2012 Mortgage Bankers CREFC Conference Feb 5 -8 : The attitude by many attendees heading into this years conference was initially tainted by the fact that this annual conference was not being held in one of its traditional spots San Diego or Orlando. This year the event was hosted by Atlanta during a week that is known for ice-storms and inclement weather. To everyones surprise, the weather was great (sunny and mild temperatures that reached the 70 degree mark), and the facilities were as pleasant as the weather. The attitude by attendees was much more tempered than the premature enthusiasm exhibited at the 2011 commercial real estate finance conference in San Diego. All seemed to recall from 2011 that stuff happens and that 2012 faces challenging headwinds with the amount of maturing CRE debt. The three highlights and one low point worth sharing are as follows: Highlight Credit Unions Panel: The 2012 MBA conference was the first time a credit union panel was hosted at this annual conference. Knowing how starved the commercial real estate industry is for capital, it was encouraging to see how capital is being reformed to meet CRE needs in nontraditional places. The panel session was titled Unexplored Capital Source The Credit Union Story. Four panelists from Kinecta Federal Credit Union out of Southern California, Delta Community Credit Union from Atlanta, Corning Federal st Credit Union and Members 1 Credit Union discussed the credit union platform for commercial real estate lending. While the bulk of CRE lending by credit unions is largely limited to the largest 200 institutions (out of a population of approximately 7,500 credit unions), credit unions are able to make construction loans, permanent loans without prepayment penalty features, and they are not timid about venturing into secondary and tertiary markets where their customer base lives, and capital is scarce. The credit union story is one to monitor and explore. I was most impressed with Paul Cleary, panelist for Kinecta Credit Union. He spoke specifically to deal structure, pricing, and property types that they are lending to especially self storage in western states. My hat is off to the MBA to opening our eyes to this emerging capital source for CRE in secondary markets and for focusing on property types outside the institutional favorites. Two highly knowledgeable resources that I met with following this panel session that I can recommend for more information on the credit union CRE lending story are: i) Clain Brandt (cbrandt@crebbonline.com) and Dale Klein from the NCUA (dklein@ncua.gov).
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Highlight SunTrust Bank and ING receptions: Both these lenders have been important capital sources to the commercial real estate industry over many decades. ING hosted a most informative function at the Georgia Aquarium preceding the opening MBA session. ING laid out a variety of innovative lending programs to meet a wide range of borrower needs. Of the major non-bank institutions that hosted functions, INGs was the most forthcoming with details - and had the broadest reach. On the bank side, SunTrust made a strong statement that it is one of a handful of regional banks healthy enough to re-engage in CRE lending. Other regional banks were still timid about revealing their CRE lending activities. Walt Mercer, who heads the commercial real estate line of business for SunTrust, is a veteran former Citi banker that weathered the 1980 and 1990 commercial real estate crises in New England. He has assembled an impressive line-up of experienced CRE lenders (no kids just learning about CRE) that are not chasing just the sexy stuff that all want. His team has depth in all property types, all the East coast markets and not just the Atlanta, Charlotte, D.C., Miami, Orlando and Tampa primary markets. Walt also has competent MAI appraisers on staff to direct valuations - and that know-how to address issues like how to value in secondary markets where there is a dearth of comparable sales. The only risk I see to SunTrusts success is Walt Mercer being snagged by the Atlanta FED to replace Dennis Lockhart who faces a mandatory age-limit retirement in 2013. While it would be great to see the caliber of a Walt Mercer lead a FED District Bank (a real banker versus an academic for a change), I think we need more Walt Mercers in our banks fighting to return capital to our industry. Stay the course Walt. We need the likes of SunTrust, US Bank, Fifth-Third, Compass and Wells Fargo providing vital capital to the commercial real estate industry. Low-Point: The closing session of the MBA: This session was a View from the FED by Dr. Thomas Cunningham. Dr Cunningham spoke extemporaneously for 90 minutes theorizing about such things as: i) Greeces debt crisis being constructive for the European Union; ii) U.S. banks having nominal exposure to EU debt (I forgot trillions is now a nominal figure inside the FED post TARP and ballooning its balance sheet to nearly $3.0 trillion); iii) CRE metrics being pretty much the same across the U.S.; iv) the problem with the Midwest today is it overbuilt manufacturing capacity 70 years ago and now it doesnt manufacture anything; and my favorite iv) non-judicial foreclosure states, like Georgia, are preferred over judicial foreclosure states, like Florida, because you get to experiment more with workout strategies regarding home foreclosures. I personally know Dr Cunningham from my days at the Atlanta FED and can affirm that he is a pretty solid researcher capable of a much better presentation and analysis of commercial real estate. Because I think it is best sometimes to invoke the Thumper Rule if you cant say something nice, dont say nothin at all - I will Page | 7

conclude by invoking the Thumper Rule. I am grateful that nearly two-thirds of MBA attendees missed this closing session due to early flights and final correspondent meetings. To the MBA, for future Views from the FED, I recommend the Kansas City FED (Esther George, president), St Louis FED (Jim Bullard, president or Dr Bill Emmons, Sr. Research Economist), or the Richmond and NY FED. 2012 ICSC Florida Idea Exchange February 16 18 : This event was perhaps the most enlightening that I have attended and presented at thus far in 2012. The pertinent items that I took away from the 3-day event worth share are: i. Auto and food-establishments are the leading retailers expanding with 50 or more new locations in 2012. Colliers Ann Natunewicz prepared the following to illustrate this point:
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iii. Medical and other services are the leading business types looking to lease space in retail. Due to the growth in online retail sales impacting goods-selling merchants, and the contraction in consumer spending and lines of capital from banks to merchants, traditional goods-selling retailers are leasing less space. That slack is being picked up by more service type establishments, especially medical. HMO, dental and optical businesses were in attendance at the ICSC exploring how retail space may be a more viable option for their businesses than traditional office space. The face of shop-space may look more like services than merchants in five years. This trend will create new underwriting, finance and CAM allocation challenges to property owners and lenders. The retail industry is in the early stages of a make-over. iv. Anchors and Lenders need to be aware of CAM recalculations when chronically vacant GLA is razed. Historically, anchor leases only envisioned GLA expanding and CAM (Common Area Maintenance) charges declining due to the addition of more retail space. However, what anchors are discovering is that CAM can increase when shopping center owners raze chronically vacant space. Lenders that feared the loss of GLA would reduce the value of their collateral to a point of loan impairment are actually discovering that there is a benefit through the recapture of CAM expenses from anchors when GLA is razed due to its recalculation using the remaining GLA. Lenders need to be aware that the value impairment may be less than thought by razing chronically vacant GLA. And, shopping center owners need to recognize that anchors are now in-tune with this lease wrinkle and will vigorously negotiate a mitigation in renewals and new leases.

ii. Property owners, such as DDR, are becoming innovative in their approach to leasing up chronically vacant space. In February just before the ICSC, DDR announced an entrepreneurial program to incubate tenants for its vacant shop space by providing a combination of capital, lease concessions and mentoring for entrepreneurial retail concepts.

The Headline(s) of the week: In Retreat, Sears Set to Unload Stores

By: Miguel BustilloWall Street Journal, February 24, 2012 In CY 2011, 30 U.S. retailers closed an aggregated 2,749 stores (from Staples with 10 store closings to Borders with 633 closures). Thus far in 2012, Payless Shoes, Famous Footwear, Food Lion and Sears lead with nearly 1,850 slated closings over the next 12-24 months. The news on Sears is disheartening with the likely loss of another American retail icon, but for most states and communities, the closings are widespread and not concentrated in any one state. Fellow Colliers retail colleagues and I have examined the Sears closings and found the following to be most pertinent: The store closings are spread across 24 states; and

The profile of a majority of the store closings is that they are located in secondary and tertiary markets in the Southeast and Midwest. Indiana, Michigan, Minnesota and Ohio lead in store closings in the Midwest, and Florida, Georgia, Mississippi and North Carolina lead with closures in the Southeast. Page | 8

THE ECONOMIC CALENDAR:

We made it through Q4 2011 earnings season and affirmed from the hundreds of 10(q) filings that: i) manufacturing is still expanding; ii) margins for those rebounding holiday retail sales were atrocious and will result in more consolidation among retailers in 2012; and iii) higher energy and transportation costs are squeezing producers, distributors and businesses margins. Inflation is back on the radar screen and noted in many corporations forward guidance, especially for Crude Goods and the raw materials going into the production of U.S. goods. In the coming weeks, we will get refreshed views on employment with a Februarys th jobs report on Friday March 9 , and the economy from the th FED in a March 13 FOMC meeting. Lets hope Chairman Bernanke has less of a stressing influence on the market than he did last week during his semi-annual HumphreyHawkins testimony to Congress.

2012 FOMC Meeting Schedule: January 24-25 February no meeting March 13 April 24-25 May no meeting June 19-20 July 31 August no meeting September 12 October 23-24 November no meeting December 11 Note: FED releases results at 2:15pm EST following each meeting and then the Chairman holds a news conference which it commenced in 2011. 2012 Bank Stress Tests - March Madness only in College Basketball this year. All U.S Banks will pass. According to the Federal Reserves Summary Instructions and Guidance for the Capital Plan Review (official reference to the bank stress tests) issued November 22, 2011, the FED responses are th due back to the banks by March 15 2012. Analysis of the results submitted to the FED are being reviewed and there does not appear to be any surprises on the horizon based on Q4 banks earnings. 2012 National Election Events: Republican Natl Convention: Aug 27-31 (Tampa, FL) Democratic Natl Convention: Sept 3-6 (Charlotte NC)

Key Future Dates to Watch:

This next week the two key economic measures to monitor relate to manufacturing and employment. Manufacturing: The ISM (Institute for Supply Management) index will likely show a modest pullback for the same reason that Durable Goods retrenched last week (end of the tax credit in December for capital expenditures by businesses). Dont over-react. Auto sales are strong and on pace to hit 15 million units in 2012 versus previous estimates of only 13 million. And, all other FED District manufacturing reports indicate solid growth in manufacturing. Employment: With respect to employment, the Challengerth Gray jobs cuts report releases on March 7 , ADP private employment job creation reports out as well on Wednesday, and then the BLS will give us its magical government math employment figures on Friday. Dont be shocked if job creation is strong at over 250,000 and unemployment rises. It is the Labor Participation Rate that is disrupting unemployment. More workers coming back into the job market due to increased hiring will cause the unemployment rate to rise. Only in the land of magical government math in America can job creation elevate the unemployment rate. GDP: Last week we received the 1 revisions to Q4 2011 GDP and it was a surprisingly strong upward revision to 3.0 percent from 2.8 percent. The primary reason for the revision was twofold: i) strong holiday retail sales; and ii) a miss on how much businesses were spending in December on capital goods to take advantage of the expiring tax credit. Q1 2012 GDP may cool back into the 2 percent range as capital spending that would have occurred in 2012 was moved forward into Q4 2011 by the tax credit. The final revision to Q4 2011 GDP will come at the end of March. GDP - BEA release of Advance and Revised estimates:
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The 2-Week period of March 5th to March 16th:

Monday March 5 : ISM manufacturing Index th Wednesday March 7 : Challenger & ADP jobs reports th Thursday March 8 : Weekly Jobless Claims. th Friday March 9 : BLS jobs report T-Bill auctions important to FOMC NFIB small business report & FOMC meeting commences. After no February meeting and the market disruption from last weeks testimony to Congress by Chairman Bernanke, this meeting and its statement will be parsed for clues on QE-3 (dead or still alive) and dissent re FED interest rate policy. th Wednesday March 14 : EIA report on oil inventories th Thursday March 15 : PPI, Weekly Jobless Claims & new numbers on the FEDs ballooning balance sheet. th Friday March 16 : CPI and new reading on Consumer st Sentiment 1 since higher gas prices. Monday March 12 : th Tuesday March 13 : Page | 9
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