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NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS 30 NAREIM Industrial: Changing Consumer Preferences Continue to Propel Industrial With online holiday-period retail sales increasing nearly 19% over the prior year, the significant tailwind provided by e-commerce continues to drive industrial demand and rents higher to levels not previously seen. > Year-Over-Year Rent Growth by Quarter We expect that demand will remain robust for the foreseeable future although the industrial sector is not without risks. Supply is increasing at meaningful levels in select submarkets. While this supply is currently being absorbed, a disruption in industrial demand would leave these submarkets most vulnerable, specifically as a result of meaningful disruption in imported goods. While this is not our base case scenario, the current rhetoric surrounding global trade agreements makes this a concern worth noting. Key Core Investment Strategy Success Factor: Overweight the highest quality logistics assets able to meet both the locational and asset specific demands of the widest array of companies and logistics supply chains. Retail: Winner-Take-All With continuing headwinds from e-commerce and ever- changing consumer preferences, retail is increasingly a winner- take-all property sector with national headlines and statistics masking wide variations in asset level performance. The highest quality assets in strongest trade areas continue to experience significantly lower vacancy rates and greater tenant demand than lower quality assets in weaker trade areas. These assets are best positioned to capitalize on macroeconomic forces that will promote spending. Continuing employment gains, the wealth effect from rising equity markets, home values that increase consumer confidence, and the resultant willingness to both save less and take on more debt are all positives for retail activity. Given the run up in consumer debt and the decline in the consumer savings rate, future retail sales growth will be increasingly dependent on both employment growth and wage growth acceleration. Since we do not foresee a substantial increase in employment growth, extending the favorable current macroeconomic environment for retail spending will become increasingly dependent on wage growth acceleration. The strongest retail assets are characterized by the following three key indicators: a center's strategic position within a trade area, a center's tenant composition, including financially strong, market- leading grocery anchors and/or non-grocery anchors selling branded goods possibly at discounted prices, and centers located in higher income, established trade areas with the necessary population base already in place. Key Core Investment Strategy Success Factor: The ability to identify the dominant assets in the strongest trade areas and to focus solely on those assets. The four major property sectors have opportunities and challenges unique to each of them. This requires an understanding of those opportunities and challenges to identify the most important core investment strategies for each. Understanding the importance of each sector's underlying drivers will increase the chances for investment outperformance in 2018. Source: American Realty Advisors Source: CoStar