MOD III
Appraisal and Analysis SPEAKER: ENGR. RUDANTE T. GUPETEO
Outline MOD III • The Nature of Shopping Centers • Shopping Center Investment Markets • Local Economic Analysis/Market and Marketability Analysis for Shopping Center Appraisals • Site & Building Characteristics of Shopping Centers • Applying the Three Valuation Approaches to Shopping Centers • Preparing Income Forecasts for Shopping Centers
The Nature of Shopping Centers
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• Shopping center – a group of commercial establishments planned, developed, owned and managed as a unit related in location, size and type of shops to the trade area it serves; it provides on-site parking in definite relationship to the types and sizes of the stores • Reflects a unified architectural design and site plan • Has sign control, landscaping, and unified management policies, usually developed through a merchants’ association
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1. A unified architectural treatment for the building or buildings which provide space for businesses that are selected and managed as a unit for the benefit of all tenants
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2. A unified site suited to the type of center demanded by the market. The site may allow for building and parking extension if trade area growth or other factors so indicate
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3. An easily accessible location within the trade area with adequate entrances and exits for vehicular and pedestrian traffic where appropriate
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4. Sufficient on site parking to meet the demands generated by the center’s retail commercial establishments. Parking should be arranged to distribute pedestrian traffic to maximum advantage for retail shopping and to provide acceptable walking distances from parked cars to center entrances and individual stores
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5. Service facilities screened from customers for the delivery of merchandise
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6. Site improvements, such as landscaping, lighting, and signage to create a desirable, attractive, and safe shopping environment
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7. Tenant grouping that provides merchandising interplay among stores and the widest possible range and depth of merchandise appropriate to the traded area
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8. Surroundings that are agreeable and comfortable for shopping and create a sense of identity and place
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Gross Building Area (GBA) – the total area contained within the exterior walls of the shopping center measured as the distance between the outer surfaces of those exterior walls Gross leasable area (GLA) – the total area designed for tenants’ occupancy and exclusive use, including any basements, mezzanines, or upper floors, expressed in square meters and measured from the centerline of joint partitions and from outside wall faces. It is the area for which tenants pay rent; it is the area that produces income
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Gross Leasable Area of Mall Shops – the total floor space occupied by mall tenants for superregional and regional centers. It does not include the area of the department store tenants or any other unowned areas Total Occupancy Area – the total floor space of the center. Includes all areas held by the center owner and any areas that are independently managed or owned but physically a part of the center.
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Common Area – the total area within the shopping center that is not designed for rental to tenants, but is available for common use by all tenants, their invitees, and adjacent stores Parking and its appurtenances, malls, sidewalks, landscaped areas, public toilets, truck and service facilities, and the like are included in the common area Parking Area – the space devoted to car parking, including onsite roadways, aisles, stalls, islands, and all other features incidental to parking
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Parking Area Ratio – the ratio of parking area to gross building area Parking Index – the number of car parking spaces made available per 100 square meter of GLA. The parking index is the standard comparison used to indicate the relationship between the number of parking spaces and the gross leasable area
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• Smallest, community shopping centers
Neighborhood shopping centers
• Midsize
Community shopping centers
*measured in gross leasable area
• Large
Regional shopping centers
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• Sometimes referred to as the major tenant or the key tenant in the shopping center. • Considered the traffic generator or the attracting force of a shopping center • Generates the greatest amount of customer patronage and is usually considered strong enough to stand alone • The type of anchor tenant depends upon the shopping center; a supermarket in a neighborhood center or a department store in a regional shopping center
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• Relatively expensive commodities that are purchased infrequently, when the desire or need for them arises • Requires more effort and time • Divided into soft goods (i.e. clothing) or hard goods (i.e. hardware and appliances)
Shopping or High-order goods
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• Neighborhood center
• 1.25
• Community center
• 4.20
• Regional center
• 4.30
• Superregional center
• 6 or more
Type of Center
Usual Minimum Site Area (in has)
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Distance and Travel Time Neighborhood shopping centers attract customers from nearby Regional shopping centers attract customers who incur more travel time
Customer Base
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Type of Center Population Support Required Neighborhood center 3,000 – 40,000 Community center 40,000-150,000 Regional center 150,000 or more Superregional center 300,000 or more
Traditional Types of Shopping Centers
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Neighborhood Center • Provides for the sale of convenience goods and personal services for the day-to-day living needs of the immediate neighborhood • A supermarket is typically the anchor tenant • Typical gross leasable area that may range in size from 3,000 to 10,000 square meters depending on the size of the anchor tenant • Smallest type of shopping center
Community Center
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• Provides a wider range of facilities for the sale of soft lines and hard lines • Makes a greater variety of merchandise available, in addition to the convenience goods and personal services • Built around a junior department store, variety store or discount department store as a major tenant and usually includes a supermarket • Does not have a full-time department store, though it may have a strong specialty store • In theory, typical size is 15,000 square meters of gross leasable area, but in practice it may range in size from 10,000 to 30,000 square meters • The intermediate type of center and is often difficult to estimate its size and pulling power
Regional Center
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• Provides general merchandise, apparel, furniture and home furnishings in depth and variety as well as a range of services and recreational facilities • Its orientation is the provision of shopping goods with substantially less emphasis on convenience goods • Built around one or two full line department stores of not less than 10,000 square meters each. • Typical size is 40,000 to 75,000 square meters of gross leasable area • Second largest type of shopping center
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Superregional Center • Provides an extensive array of general merchandise, apparel, furniture, and home furnishings as well as a variety of services and recreational facilities • Built around at least three major department stores of not less than 10,000 square meters each • Typical size of a superregional center is about 80,000 square meters of gross leasable area
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Specialty Shopping Centers A shopping center that is characterized by the absence of a traditional anchor tenant.
Festival Shopping Centers
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• Contains stores that sell impulse specialty goods, either exclusively or as a high percentage of their total merchandise mix • Large portion of the GLA is devoted to restaurants and food vendors that offer ethnic authenticity and uniqueness • May also have a strong entertainment theme • Often applied to any relatively small shopping centers located near a major regional shopping mall
Fashion Shopping Centers
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• Concentration of apparel shops, boutiques, and custom shops that carry special, high-quality merchandise • May include one or more high-quality fashion stores • The tenant mix and quality are commensurate with the economic profile of the trade area population • Maybe anchored by one or more major specialty or better-quality department stores or by a medium sized specialty store supplemented with an appropriate array of fashion oriented minor stores
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Off-Price Outlet Shopping Centers • Factory outlet is owned and operated by the manufacturer and sells good directly to the public • Off-price retailer is like a discount store that sells brand-name merchandise at lower prices than can be found elsewhere
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Discount Shopping Centers
• A community center anchored by a discount department store • Smaller than a regional mall anchored by a department store • There is a lower percentage of national or regional tenants and therefore, a higher percentage of local tenants
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Power Centers • Large community centers with more than 25,000 square meters anchored by at least three, but often four or more, anchor tenants that occupy approximately 75% (60%-90%) of the gross leasable area • Generally located near regional malls in suburban markets
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Hypermarket • Large community centers with more than 25,000 square meters anchored by at least three, but often four or more, anchor tenants that occupy approximately 75% (60%-90%) of the gross leasable area • Generally located near regional malls in suburban markets
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Warehouse Club • Not a shopping center according to accepted definitions • 10,000 to 12,000 square meters in area and have nontraditional locations • Sell quality, brand-name merchandise at deeply discounted prices • High profits result from bulk purchases of a carefully limited selection of high turn-over merchandise and little advertising
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Shopping Center Investment Markets • Shopping centers have traditionally been considered very desirable investments • Advantages include financial security (secured by anchor tenants), rented on a net lease basis, opportunity to renew retailing space periodically
Risk MOD III
Successful investors in shopping centers must identify and manage real estate investment risks. The purchase or construction of a shopping center is frequently financed with too much mortgage indebtedness During periods of excess competition, a center’s operating income may be insufficient to cover debt obligations and still provide an acceptable equity yield Location is critical. A shopping center must receive the support of a trade area with sufficient purchasing power and not be burdened by excessive competition A center must have adequate ingress, egress, and visibility
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Local Economic Analysis for Shopping Center Appraisals/Market and Marketability Analysis
Key Economic Variables
Market rent, vacancy rate, the number of potential customers, and consumer income. Types of Studies Local economic analysis, market analysis and marketability analysis
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Local Economic Analysis • An appraiser investigates the major economic variables in the local economy that affect the supply of and demand for all types of real estate products and space • Variables include employment, population, households and families. Income, purchasing power
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Market Analysis • The appraiser considers the supply and demand for a particular type of retail space in a predetermined geographic area
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Marketability Analysis • Marketability analysis is directly linked to market analysis, but attention is focused on a specific site Â
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Size of the Site
Site Characteristics
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• Footprint of the building – must have enough area to contain the shopping center structure as well as all attendant ancillary facilities • Customer parking – major site requirement. Consideration must be given on parking standards (parking index) and peak hour demand for parking space • Parking lot circulation • Parking lot lighting and security • Parking in relation to building entrances • Employee parking • Other site requirements – size of the site must be large enough to accommodate delivery and service space
Shape of the Site
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• Normal frontage to depth relationship • Narrow frontage and great depth – lacks visibility from the major street • Wide frontage and shallow depth – less visibility from the intersecting street and a parking problem • Irregular shape – can be evaluated considering building to street depths, location, the visibility of buildings on the site, and the adequacy of internal circulation given odd boundary configuration
Access to the Trade Area • The relationship of the site to the street system and thus to its retail trade is a very important site characteristic
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Relationship to the Street Pattern • The ideal shopping center location is almost always at the intersection of two major streets or highways • Common wisdom suggests that corner lots should be more valuable as shopping center sites than interior lots, but this effect may be obscured in the market by the tenant composition of the shopping center or the reputation and prestige of the anchor tenant
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Ease of Access • The design of the site must take into consideration adequate curb cuts and turn lanes • Access onto the site is also affected by the relationship between the parking surface and the street
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Visibility • A store must be visible to passing traffic • Several factors that can affect visibility include street location, position on the site, obstructions, site elevation, and architecture • Architectural features that reduce visibility include overhangs and canopies, which block the view of individual storefronts; recesses and indentions in the front of the building; and courtyards
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Signage • Signage has two components – the shopping center sign and tenant signs
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Landscaping • Landscaping relates to both attractiveness and visibility • Should be limited grassy areas and low-lying shrubbery which adds aesthetic appeal but does not obstruct visibility • Must be maintained. May be an additional cost to the operation of the center
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Topography and Drainage • Topography is a very important site characteristic because it can affect the physical design of the site as well as the design and construction of the building or buildings • Subsurface soil characteristics and drainage are also important
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Utilities, Zoning, Subdivision Regulations and Construction Codes • Level of utility service to the different retail establishments important within the shopping center • Zoning, subdivision regulations and construction codes affect the development and construction of a shopping center and can have long-term effects on the center’s revenue potential, maintenance and repair expenditures and other line items in the income and expense statement
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Exterior Building Characteristics • • • •
Building Building Building Building
size configuration or shape elevation and materials entrances
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Interior Building Characteristics • Storefronts • Store size • Building flexibility • Multiple levels • Food courts • Interior signage
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Property Rights and their Modification
• Fee simple estate vs Leased fee estate.
Value Definitions
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Market Value, Investment Value, Business Valuation, Goingconcern Value • Market value • Investment value – specific value of an investment to a particular investor or investors • Business valuation – an appraisal of a business, usually performed to determine the present and future monetary rewards of complete or partial ownership rights in the business • Going-concern value – value of a proven property operation; distinct from the value of the real estate only
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Appraisal Highest and Best Use Analysis, The Sales Comparison Approach, The Cost Approach, The Income Approach Â
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Important Things to Consider
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• Direct capitalization vs discounted cash flow analysis • Lease clauses, estimation of next year’s revenue and expected growth • Income forecasts – estimated to include base rentals, percentage rentals and tenant reimbursements for expenses • Leasing commissions and tenant improvement allowances • Expense.
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END OF PRESENTATION