The. craft beer. guidebook. to real estate. Summer 2017 What every brewery needs to know about real estate

The guidebook craft beer to real estate Summer 2017 What every brewery needs to know about real estate

2 The craft beer guidebook to real estate

content State of Craft Beer 4 Number of breweries in the U.S. 4 Production trends across states 6 Key craft beer states 8 Local beer hubs 10 Expansions: industrial to retail 12 The Real Estate Process 14 From leasing to brewing 14 Outlook 16 3

State of Craft Beer Most craft breweries in the U.S. on record Thirty-six states have more than doubled their craft beer production from 2011 to 2016. Nearly half of those states tripled their craft beer production. More production means there are more market entrants and brewers expanding their production capacity. Warehouses and retail properties benefit from a growing craft beer industry that has more than doubled its total beer production since 2011. This is a nationwide trend that fills industrial and retail vacancies and reinvigorates local markets. These trends translate into a larger impact on the industry s real estate footprint. While overall beer sales remained virtually flat in 2016, craft beer sales grew by 6.2 percent, accounting for 12.3 percent of the market. This market share is significantly larger than the 5.7 percent recorded in 2011. Despite rapid growth over the past five years, the industry is expected to slowdown due to increased saturation. There were fewer brewpub and micro brewery openings in 2016 than the previous two years, with a slight uptick in closings. What is craft beer, and why does it matter? According to the Brewers Association s definition, craft breweries must satisfy three qualifications: 1. A craft brewer must produce no more than 6 million barrels per year 2. Less than 25 percent of the company is owned by an entity that is not a craft brewer 3. Traditional or innovative ingredients account for a majority of beer alcohol volume and flavor (does not include flavored malt beverages) Craft breweries impact local economies with more jobs and increased revenue from sales taxes, licensing fees and other fees. According to the Brewers Association, the craft brewing industry injected $55 billion into the U.S. economy in 2014 and created more than 424,000 jobs. The industry had an economic impact of $2.2 billion in Illinois alone. National total craft beer production 1985 1986 1987 1988 1989 1990 Source: Brewers Association 4 The craft beer guidebook to real estate 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Beyond economics, craft brewers reflect the culture and character of their local communities. Any visit to a local beer city, like Chicago or San Diego, will illustrate that local brewers often name their beers after local traditions and culture. Chicago s Off Color Brewing teamed up with the Field Museum to create the pilsner Tooth & Claw. San Diego s Karl Strauss Brewing produces the year-round Tower 10 IPA, named after lifeguard Tower #10 in Mission Beach, where the brewery founders started their business idea. The craft beer guide This guidebook provides production and brewery data in states across the country and identifies the latest trends in local beer hubs. It is meant to educate those interested in the craft brewing industry and provide information for brewers who are interested in their impact on real estate. (barrels) What do you like most about the industry? 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 Camaraderie true, independent local craft beer is unlike other industries in that these breweries collaborate with one another on raw material shortages, brewery configuration and beer releases. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 - Matt Rattner, President of Karl Strauss Brewing Company 5

Production trends across states Craft beer is booming across the country, especially in the South. Of the top 20 states for annual barrel production growth from 2011 to 2016, 8 were in the South. Alabama brewers opened up a market that was nearly nonexistent in 2011. The state increased production by over 6,000 percent, despite failure to pass three bills that would have enabled brewers to selfdistribute and sell directly to consumers. The latter changed in 2016, as Alabama brewers can now sell growlers and packs of beer to go. 6 The craft beer guidebook to real estate

Production growth by state (2011-2016) Alabama Florida North Dakota District of Columbia North Carolina Arkansas Tennessee Connecticut Illinois West Virginia 0% 1000% 2000% 3000% 4000% 5000% 6000% 7000% 25.0 20.0 15.0 10.0 5.0 0.0 Gallons produced per adult by state (21+ years of age) 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Total craft beer production by state (2016) Pennsylvania California Colorado Ohio North Carolina Florida Texas Oregon New York Wisconsin Source: JLL Research, Brewers Association 7

Key craft beer states Production (2016): 1.2 million barrels Breweries per capita (2016): 8.1 Notable breweries: Deschutes, Full Sail Brewing OREGON Production (2016): 337,582 barrels Breweries per capita (2016): 2.0 Notable breweries: Revolution Brewing, Two Brothers Brewing Co. ILLINOIS Production (2016): 3.3 million barrels Breweries per capita (2016): 2.2 Notable breweries: Sierra Nevada Brewing Co., Stone Brewing Co. CALIFORNIA Production (2016): 1.4 million barrels Breweries per capita (2016): 8.4 Notable breweries: New Belgium Brewing Co., Oskar Blues Brewing Holding Co. COLORADO Source: JLL Research, Brewers Association 8 The craft beer guidebook to real estate

Production 1,000,000 + 500,000-1,000,000 250,000-500,000 < 250,000 MINNESOTA Production (2016): 609,415 barrels Breweries per capita (2016): 2.8 Notable breweries: August Schell Brewing Co., Summit Brewing Co. OHIO Production (2016): 1.4 million barrels Breweries per capita (2016): 2.1 Notable breweries: Great Lake Brewing Co., Fat Head s Brewery NORTH CAROLINA Production (2016): 1.3 million barrels Breweries per capita (2016): 2.8 Notable breweries: Highland Brewing Co., Foothills Brewing Co. MICHIGAN Production (2016): 846,029 barrels Breweries per capita (2016): 3.1 Notable breweries: Bell s Brewery, Atwater Brewing Co. Breweries per capita is the number of craft breweries per 100,000 adults ages 21+ 9

Sample flight: local beer hubs California North Carolina 408 microbreweries 209 brewpubs 26 regional breweries 134 microbreweries 57 brewpubs 11 regional breweries Miramar Corridor San Diego Downtown Asheville There are 14 craft breweries along the 2.5-mile stretch of Miramar Road between I-15 and I-805. This is home to Green Flash and AleSmith Brewing Company. The craft beer industry is a driver of tourism for Asheville. Visitors and locals can taste a pint from an abundant amount of breweries within walking distance. The River Arts District is an up-and-coming location for restaurants and breweries. Green Flash Brewing Company Source: Jamie Lantzy Burial Beer Company 10 The craft beer guidebook to real estate

Oregon Ohio 134 microbreweries 96 brewpubs 9 regional breweries 101 microbreweries 73 brewpubs 7 regional breweries Close-In Portland Over-the-Rhine Cincinnati Beer is synonymous with Portland. The Close-In area offers strong walkability to more than 10 breweries within a 2-mile radius. Beer drinkers can also take advantage of the bus tours that hop from brewery to brewery. Over-the-Rhine is a diverse neighborhood in Cincinnati that once served as a commercial and industrial hub for the city. Beer is helping revitalize the neighborhood, which is now spotted with music venues, retail, and business incubators. Hair of the Dog Brewing Company Source: Evan Lovely Taft s Ale House Source: 5chw4r7z 11

expansions Chicago, Illinois Source: Brewbokeh, Half Acre Half Acre built additional production facility totaling 60,000 square feet in Chicago, Illinois. The brewery opened its outdoor beer garden in September of 2017. Asheville, North Carolina Source: Authentic Asheville, Wedge Wedge Brewing Company expanded into 7,500 square feet at the Foundation in the River Arts District of Asheville, North Carolina. The space includes 1,500 square feet of event space. 12 The craft beer guidebook to real estate

Richmond, Virginia Source: Stone Brewing - Richmond Escondido s Stone Brewing opened its 220,000-square-foot distribution center in Richmond, Virginia in 2016. This facility will be supplemented by a restaurant on the riverfront within the next couple of years. industrial to retail Cincinnati, Ohio Source: MadTree Brewing MadTree Brewing opened its 50,000-square-foot facility in February 2017 at 3301 Madison Road in the Oakley neighborhood of Cincinnati. The space includes a 10,000-square-foot, dog-friendly beer garden and 64 taps. 13

From leasing to brewing First contact Contact a local market expert to start your search for brewing space. Milling and mashing While milling is the first step to ensuring grains are ready to mash, many brewers purchase milled grains. Milled grain is placed in the mash tun and mixed with hot water, which activates enzymes to convert starches in the grain to sugar. Identifying requirements How much space do you need to accommodate your production? What is your price point? What is your logistics strategy? Lautering This step separates spent grain from the sugary liquid, called wort. Water extracts additional sugar from the grain. Site Selection After identifying requirements, use the latest technology to find and tour available spaces in the given geography. Boiling Wort is boiled for sterilization. Hops are added during this process to add bitterness. Hops added toward the end of the boil add aroma and flavor. 14 The craft beer guidebook to real estate

Negotiate lease terms You found the perfect spot to start brewing your next delicious batch of beer. Now, it s time to start negotiating to maximize your budget. Cooling After the boil, the wort goes through a whirlpool to collect undesirable matter. This is immediately followed by cooling, as the wort will start producing flavor. Sign/Execute lease Negotiation went well and you signed your lease. Fermenting Wort is sent to a stainless steel vat to begin fermentation. Yeast is added to create alcohol and additional flavors, depending on the strain of yeast. Build-out commencement The lease is signed and commencement is set. Follow up with details on moving into the new space and building out your new home. Conditioning After the beer has matured, it is filtered, carbonated and conditioned in a bright tank to leave a clear and drinkable beer. Start packaging and brewing! 15

outlook Craft brewers need to differentiate and educate as the market saturates and acquisitions increase. The industry is becoming saturated. There were more breweries in the United States in 2016 than in any other year going back to 1873. Increased competition is forcing many brewers to market their product and differentiate with a diverse and highquality collection of beer styles. The increasing amount of unproven entrants may cause fatigue for consumers and distributors. Since craft beer is the engine behind recent overall beer growth, larger breweries are making strategic acquisitions. Acquisitions cause confusion for consumers. Consumers may think they are drinking craft beer, when it is really a brand for a larger macro brewer. As a result, craft brewers need to invest and adapt to educate their consumer base to maintain production and revenue growth in the long term. A slowing craft beer industry has immediate effects for commercial real estate. Absorption is expected to slow overall as demand dissipates from fewer new market entrants. Other markets that have lifted production limits will continue to grow as brewers meet demand for craft beer. On the other hand, regional breweries are in position to expand their distribution and footprint across the Untied States. 16 The craft beer guidebook to real estate