Appendix B RETAIL MARKET ANALYSIS O P M U P NE ASEO IXED SE ROJECT R M A ETAIL ARKET NALYSIS Prepared For: KILROY REALTY CORPORATION 3611 Valley Centre Drive, Suite 550 San Diego, CA 92130 Telephone: (858) 523-0300 www.kilroyrealty.com Prepared By: KOSMONT COMPANIES 865 S. Figueroa Street, #3500 Los Angeles, CA 90017 Telephone: (213) 417-3300 www.kosmont.com F 9, 2012 EBRUARY T C ABLE OF ONTENTS Section Page 1.0 Executive Summary ........................................................................................................ 1 2.0 Introduction ..................................................................................................................... 2 2.1 Purpose ....................................................................................................................... 2 2.2 Sources of Information ................................................................................................ 2 2.3 Summary of Methodology ........................................................................................... 3 2.4 Retail Classification ..................................................................................................... 4 3.0 Project Description ......................................................................................................... 5 3.1 Location ....................................................................................................................... 5 3.2 Project Components .................................................................................................... 5 3.3 Project Phasing & Timing ............................................................................................ 5 4.0 Existing & Projected Retail Conditions .......................................................................... 6 4.1 Existing Retail Conditions in the PMA ......................................................................... 6 4.2 Existing Retail Conditions within the Trade Area ........................................................ 6 4.3 Proposed Retail Developments within the Trade Area ............................................... 9 5.0 Retail Demand Analysis Summary ............................................................................... 10 5.1 Project Impact on Retail Demand - GAFO Component ............................................. 10 5.2 Project Impact on Retail Demand - Eating and Drinking Component ....................... 10 5.3 Cumulative Impact of Projects Planned in the Trade Area ........................................ 11 5.4 Potential for Adverse Impacts ................................................................................... 13 6.0 Retail Demand Analysis Methodology ......................................................................... 14 6.1 Households ............................................................................................................... 14 6.2 Household Income .................................................................................................... 14 6.3 Total Income ............................................................................................................. 15 6.4 Percentage of Income Spent on Retail Goods .......................................................... 15 6.5 Expected Retail Sales ............................................................................................... 16 6.6 Sales by Retail Store Type ........................................................................................ 16 6.7 Expected Retail Sales by Retail Category ................................................................ 18 6.8 Expected Capture Rate of Retail Demand ................................................................ 19 6.9 Expected Sales Capture ........................................................................................... 20 6.10 Retail Sales Leakage Analysis ................................................................................ 22 6.11 Net Retail Demand .................................................................................................. 23 6.12 Net Supportable Retail Square Footage ................................................................. 23 7.0 Definitions & Assumptions .......................................................................................... 26 Appendices ................................................................................................................................ 27  Table of Contents KILROY ONE PASEO - RETAIL MARKET ANALYSIS I F & NDEX OF IGURES TABLES Figure/Table Page Figures Figure 1: Map of Primary & Secondary Market Areas .................................................................. 3 Figure 2: One Paseo Project Location Map .................................................................................. 5 Figure 3: Map of Existing Retail Centers within the PMA ............................................................ 7 Figure 4: Map of Existing Retail Centers within the SMA ............................................................. 8 Figure 5: Map of Proposed Retail Centers within the Trade Area ................................................ 9 Tables Table 1: Core Commercial Vacancy Rates ................................................................................... 6 Table 2: Expected Net Supportable GAFO Retail Space ........................................................... 10 Table 3: Expected Net Supportable Eating and Drinking Retail Space ...................................... 10 Table 4: PMA & SMA Expected Capture Rates .......................................................................... 11 Table 5: Total Retail Square Footage Proposed within the Trade Area ..................................... 12 Table 6: Total GAFO Square Footage Proposed within the Trade Area .................................... 12 Table 7: Total Eating and Drinking Square Footage Proposed within the Trade Area ............... 12 Table 8: Total Food Square Footage Proposed within the Trade Area ...................................... 13 Table 9: PMA & SMA Historic & Projected Households ............................................................. 14 Table 10: PMA & SMA Historic & Projected Average Household Income .................................. 15 Table 11: PMA & SMA Historic & Projected Total Income .......................................................... 15 Table 12: PMA & SMA Historic & Projected Expected Retail Sales ........................................... 16 Table 13: Percent of Total Retail Sales by Store Type - PMA .................................................... 17 Table 14: Percent of Total Retail Sales by Store Type – SMA ................................................... 17 Table 15: Historic & Projected Expected Retail Sales by Retail Category - PMA ....................... 18 Table 16: Historic & Projected Expected Retail Sales by Retail Category - SMA ....................... 18 Table 17: PMA & SMA Expected Capture Rates ........................................................................ 19 Table 18: Expected Sales Capture – PMA ................................................................................. 20 Table 19: Expected Sales Capture – SMA ................................................................................. 21 Table 20: Expected Sales Capture – PMA & SMA ..................................................................... 21 Table 21: Expected Demand vs. Actual Sales (Leakage Analysis) ............................................ 22 Table 22: Expected Net Retail Demand ...................................................................................... 23 Table 23: Expected Sales per Square Foot ................................................................................ 24 Table 24: Net Supportable Retail Space ..................................................................................... 24 Table of Contents KILROY ONE PASEO - RETAIL MARKET ANALYSIS 1.0 Executive Summary Kilroy Realty Corporation (“Developer” or “Kilroy”) has submitted a proposal to the City of San Diego (“City” or “San Diego”) to develop a 24-acre mixed-use development called One Paseo (“Project” or “One Paseo”) at the southwest corner of Del Mar Heights Road and El Camino Real in the City. Kosmont Companies (“Kosmont” or “Consultant”) was retained to prepare a Retail Market Analysis (“Analysis”) for the Project’s retail components. As proposed, the Project’s retail component is expected to include apparel, general merchandise, home furnishing and appliance, and a variety of eating and dining establishments. More specifically, the commercial retail components of the Project are expected to total approximately 220,000 square feet wherein approximately 130,000 square feet of the proposed Project’s retail would be comprised of General Merchandise, Apparel, Home Furnishings / Appliances, Other (“GAFO”) retailers with 60,000 square feet made up of Eating and Drinking places and the remaining 30,000 square feet as Food (grocery) users. The Analysis evaluates the existing and projected demand for the various retail components within a ten mile radius of the proposed Project (“Trade Area”). Within the Trade Area, a primary market area (“PMA”) and a secondary market area (“SMA”) are identified as follows: the PMA consists of the area within a 0-4 mile radius of the Project and the SMA is comprised of an area within a 4-10 mile radius of the Project (exclusive of the PMA). These boundaries were established using industry standard radii measures, certain geographic boundaries such as the Interstate 5 / 805 interchange as well as Kosmont’s experience with consumer retail shopping patterns. The existing and projected retail demand was then compared to the actual volume of sales, thereby establishing a net retail demand. The net retail demand was compared to the retail supply that would be created should the Project be developed. It is Kosmont’s conclusion that based on the existing and projected retail supply and demand it is unlikely for the Project to have a significant negative impact on the existing retail establishments within the PMA or the overall Trade Area. Kosmont estimates that should the proposed Project be developed in conjunction with other currently-planned retail projects in the Trade Area, the PMA will be underserved and maintain a net demand for additional retail square footage. When net demand exists, market conditions are generally favorable for retail businesses, and as a result retailers will not be forced to close for reasons related to insufficient demand caused by the Project. Should existing businesses close, it would likely occur on an intermittent/site-specific basis, and primarily for reasons unique to those businesses. Further, as market conditions remain favorable based on the net demand for additional retail square footage, it is unlikely the Project will cause significant business closures and long-term vacancies, which would cause property owners to cease maintaining their properties and leave decaying, unoccupied shells. Executive Summary 1 KILROY ONE PASEO - RETAIL MARKET ANALYSIS 2.0 Introduction 2.1 Purpose Kosmont Companies (“Kosmont” or “Consultant”) was retained to undertake a Retail Market Analysis (“Analysis”) for the retail component of a 24-acre mixed-use development known as One Paseo (“Project” or “One Paseo”) in the Carmel Valley community planning area of the City of San Diego (“City”) at the intersection of Del Mar Heights Road and El Camino Real. The purpose of the Analysis is to examine existing retail market conditions and trends and evaluate the potential for future retail product to be constructed (including the proposed One Paseo Project). For purposes of this Analysis prepared for the Project, Kosmont established the following criteria to determine if the Project’s market impacts would be significant enough to create a lasting physical change in a market area:  Diversion of sales from existing retail facilities are severe enough to result in a chain reaction of business closures and subsequent long-term vacancies;  The business closures are significant enough in scale (i.e., in terms of the total square footage affected and/or the loss of key “anchor” tenants) to affect the viability of existing shopping centers or districts; and  Would such impacted shopping centers or districts deteriorate and lead to a decline in the associated or nearby real estate. 2.2 Sources of Information The Analysis utilizes information from the following sources:  Cities of San Diego, Encinitas, Del Mar, Solana Beach, Carlsbad and San Diego County  Urban Land Institute, Dollars and Cents of Shopping Centers / The SCORE 2008  ESRI – Demographic and market data for the area surrounding the Project  Bureau of Labor Statistics, 2008 Consumer Expenditure Report  Eureka Group, California Retail Survey 2010  Cassidy Turley BRE Commercial  Kilroy Realty Corporation  Colliers International  Marcus & Millichap  US Census, 2010 Introduction 2 KILROY ONE PASEO - RETAIL MARKET ANALYSIS 2.3 Summary of Methodology For this Analysis a primary market area (“PMA”) and a secondary market area (“SMA”) were established based on industry standard radii measures in conjunction with certain geographic boundaries and market specific factors. The PMA consists of the area within a 0-4 mile radius from the Project, delineated based on the location and concentration of retail installations to the north as well as the Interstate 5 / 805 interchange which functions as a natural boundary. Additionally, 0-4 mile PMA considers the travel patterns along State Route 56, which serves as a primary transportation corridor to the Project from the east. The SMA consists of the area within a 4-10 mile radius of the Project (exclusive of the PMA) and was established based on the I-15 as an approximate eastern boundary, yet extended slightly beyond based on the location of existing retail projects to the east and north of the SMA. The total area encompassed by both the PMA and SMA is called the “Trade Area”. The Analysis includes the following steps: 1. Estimate the potential demand for apparel, general merchandise, home furnishings and appliances, other retail stores and eating and dining establishments based on existing and projected demand based on demographic data within the PMA and SMA; 2. Compare the potential demand to the historical actual sales volume of the applicable retail stores and eating/dining establishments in the PMA and SMA; 3. Evaluate the potential demand for the applicable retail stores and eating/dining establishments based on projected demographics relative to existing sales volume and potential sales volume of the proposed Project and planned/expected retail projects within the PMA and SMA. Figure 1: Map of Primary & Secondary Market Areas PPrrooppoosseedd PPMMAA PPrroojjeecctt ((AArreeaa WWiitthhiinn aa 00 ttoo 44 mmiillee RRaaddiiuuss)) SSMMAA ((AArreeaa WWiitthhiinn aa 44 ttoo 1100 mmiillee RRaaddiiuuss)) N Source: ESRI; Kosmont Companies, 2011 Introduction 3 KILROY ONE PASEO - RETAIL MARKET ANALYSIS The PMA and SMA include all of or portions of the following geographic areas: PMA  City of San Diego  Unincorporated San Diego County  Del Mar  Solana Beach SMA  City of San Diego  Unincorporated San Diego County  Carlsbad  Encinitas 2.4 Retail Classification The Analysis categorizes retail into three generally accepted primary groups and corresponding subcategories as follows: 1. “Shopper Goods” a. Subcategories include “Apparel”, “General Merchandise”, “Home Furnishings / Appliances”, and “Other”. Collectively the Shopper Goods are commonly referred to as “GAFO” (General Merchandise, Apparel, Home Furnishings / Appliances, Other), and will be commonly referred to as such in this Analysis1. GAFO is a term commonly utilized in retail analysis to denote the abovementioned retail categories. 2. “Convenience Goods” a. The second primary category, Convenience Goods, is comprised of “Food (Supermarket/Liquor)” and “Eating and Drinking” categories. 3. “Heavy Commercial Goods”. a. The third primary category, Heavy Commercial Goods is comprised of “Building/Hardware/Farm”, “Auto Dealers and Parts”, and “Service Station” categories. 2 1 The GAFO retail square footage (“SF”) of the proposed Project is expected to consist of major retailers whose merchandise mix includes elements of each of the GAFO components and as such, the square footage of these major retailers will be evaluated as GAFO rather than on the individual components of GAFO. 2 For reference, depending on the type of retailers included in the Project, Building/Hardware/Farm is often grouped into the GAFO category as many modern building and hardware stores sell GAFO merchandise in addition to strictly building and hardware products. The retail uses described above are for illustrative and analytical purposes. Please consult the Project description section of the EIR for a more detailed description of the retail uses proposed for the Project. Introduction 4 KILROY ONE PASEO - RETAIL MARKET ANALYSIS 3.0 Project Description 3.1 Location The Project is located in the Carmel Valley community planning area of the City of San Diego which is located along the western edge of San Diego County. Communities bordering the Project’s location include unincorporated San Diego County and the incorporated cities of Solana Beach, Del Mar, Carlsbad and Encinitas. The Project’s 24-acre site is located in the northwestern region of the City. The Interstate 5 Freeway (“I-5”) is approximately 0.5 miles west of the Project and State Route 56 is approximately 1.0 miles south of the Project. The Site is currently unimproved and lies within an urbanized area of the City consisting primarily of commercial retail, office and residential uses. The Site is bounded by residential uses to the north and northwest, commercial retail to the east and south east, commercial office to the south and west. Figure 2: One Paseo Project Location Map ( ) N Source: ESRI, 2011; Kosmont Companies, 2011 3.2 Project Components As proposed, the mixed-use Project is anticipated to include a 220,000 square foot retail component with apparel, general merchandise, home furnishing and appliance, and a variety of eating and dining establishments. Approximately 130,000 square feet of the proposed retail would be medium-box GAFO retailers. Approximately 60,000 square feet will be made up of Eating and Drinking places and remaining 30,000 square feet as Food (grocery) users. 3.3 Project Phasing & Timing The Project’s retail component is expected to be built in three phases with phase one commencing in 2013 (approximately 100,000 square feet), phase 2 commencing in 2014 (approximately 66,000 square feet) and phase 3 commencing in 2015 (approximately 54,000 square feet). Stabilization is estimated to occur between 2014 and 2016. Project Description 5 KILROY ONE PASEO - RETAIL MARKET ANALYSIS 4.0 Existing & Projected Retail Conditions 4.1 Existing Retail Conditions in the PMA To examine existing conditions in the PMA, Kosmont analyzed data from the San Diego County Assessor’s Office, data gathered from ESRI and from local real estate brokers and augmented these efforts by performing a windshield survey. From this research, Kosmont determined that there is currently approximately 1.90 million square feet of retail space within the PMA. This includes square footage dedicated to each of the primary retail categories (Shopper Goods, Convenience Goods and Heavy Commercial Goods). Based on information provided by Cassidy Turley BRE Commercial, the vacancy rate of core retail space in the Central San Diego County3 area has fluctuated between a low of 0.9% during the 2005 and a high of 4.2% during 2009. Since 2005 the vacancy rate of core retail has increased steadily with a spike in 2009 and slight decline in 2010. A vacancy rate of 5% is considered stable for core retail and therefore the market appears healthy at this time as the current vacancy rate is below industry accepted conditions for levels of vacancy. Table 1: Core Commercial Vacancy Rates Central San Diego County Retail Vacancy Rates 2005 2006 2007 2008 2009 2010 0.9% 1.0% 1.7% 2.0% 4.2% 4.1% Source: Cassidy Turley BRE Commercial, 2010 4.2 Existing Retail Conditions within the Trade Area In order to evaluate existing retail conditions in the Trade Area, Kosmont analyzed over 100 retail centers within the Trade Area, representing an estimated 14.00 million square feet4 of retail space (1.90 million in the PMA and 12.10 million in the SMA). These retail centers range in total size from a few thousand square feet up to 1.5 million square feet and include centers similar in scale to the proposed Project as well as neighborhood and community centers which are smaller than the proposed Project. Vacancy Rates Within the PMA, approximately 63,270 square feet of the 1.90 million square feet was vacant (a vacancy rate of 3.33%). Within the SMA, approximately 515,460 square feet of the 12.10 million square feet was vacant (a vacancy rate of 4.26%). These estimates generally confirm vacancy data as published a number of retail brokerage research reports for the area surrounding the Project. 3 Central San Diego County is a geographic definition established by Cassidy Turley BRE Commercial which is where the One Paseo Project is located. 4 Square footage is based on published figures from center operators/industry sources, broker data, and estimates by Kosmont based on aerial images (as needed). Existing and Projected Retail Conditions 6 KILROY ONE PASEO - RETAIL MARKET ANALYSIS