13
Existing
Shopping Center
Chapter Overview
This chapter presents a step-by-step procedure and techniques for
performing a market and marketability analysis as part of a valuation
appraisal of an existing retail shopping center. First, trends in retail
properties will be discussed, followed by concepts and terms unique
to retail properties. Next, an overview of the analytical process will
be provided. Finally, the process will be applied to the appraisal of a
specific retail subject, discussing each step in detail.
Section I
Section II
Section III
Section IV
Trends in Retail Properties
General Concepts of Retail Market Analysis
The Market Analysis Process for a Retail Center
Case Study
The application presented is a Level C fundamental market
analysis. The procedure described is only one of the many variations
that could be applied. The analytical techniques used depend on the
characteristics of the subject property, the market conditions on the
date of the appraisal, the availability of data, the needs of the client,
and the judgment and experience of the appraiser.
This case study will discuss three different methods of fundamental
demand analysis in order to show various tools that might be used depending on the data availability and study questions. Most market studies or appraisals would not necessarily involve all three methods, but
they are all included here to illustrate the range of techniques available.
Section I. Trends in Retail Properties
A shopping center is a tract of land, under individual or joint real
estate ownership or control, improved with a coordinated group of
retail buildings that contain a variety of stores and offer free parking.1
In recent years, individual supercenters by retailers such as Target
and Wal-Mart have emerged that contain full-line grocery, department store, automotive, nursery, and convenience items, all under
one roof, and that function as shopping centers on their own. Thus, in
this book, the term shopping center refers to the traditional multitenant shopping center as well as to the stand-alone big-box stores and
other one-store concepts that function similarly to or compete with
traditional shopping centers. Regardless of whether an individual
shopping center is a multitenant property or a stand-alone property,
in practice shopping centers are planned and managed as a unit, and
their location, size, and retail mix are determined by the trade area
that they serve.
Until the mid-twentieth century, retail activity in the United
States was concentrated in the downtown areas of cities and towns.
After World War II, the production and use of the automobile increased significantly and, along with government programs like the
interstate highway system and new government housing programs,
contributed to the change in urban development patterns toward the
suburbs. Consequently, retail activity has been dispersed throughout
metropolitan regions and into specialized areas and outlying centers.
The nature of retail activity continues to change. During the
1960s and 1970s, the retail trend favored enclosed malls. The 1980s
brought a dispersion of neighborhood and community centers
throughout the metropolitan areas. The 1990s introduced the power
center, a retail concept that included a number of major stores and
very little in-line space. The 1990s were also the advent of the entertainment center, which contains a mix of retail, restaurants, and
entertainment uses. Entertainment ranged from restaurants to movie
houses to massive game rooms, with the idea being that children
would lure their parents to the center so that the retailers could
entice them to part with their money. The outlet mall, a large concentration of major retail stores selling their seconds merchandise, also
arose during this time. Typically, these stores are located some distance from the primary chain store. They are usually located outside
of major metropolitan areas and serve a large trade area.
Various other trends emerged around 2000. For example, the
stand-alone community department store located full-line department stores in neighborhoods. These stores usually carried economically priced merchandise. Another significant trend that gained
traction in the early years of the twenty-first century was the lifestyle
center, which aimed to attract higher-income shoppers through con-
1.
The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
234 Market Analysis for Real Estate
venience and tenant mix. The likely tenant types at lifestyle centers
are more upscale specialty stores such as home furnishings, women’s
fashion, bookstores, restaurants, and some major department store
anchors. The lifestyle center is designed as an open-air mall where
shoppers can drive up to the stores. These centers typically vary in
size from 300,000 to 500,000 square feet. The upscale architectural
design is intended to create a nostalgic experience, the goal being to
create a downtown shopping experience reminiscent of the 1940s
and 1950s. In the United States, this open-air center has proven to be
successful in the cold climates of the north states as well as the hot
humid climates of the southern states. This type of center also proved
to be economical, as typical sales for the first half of 2005 were about
$298 per square foot, compared to about $245 for traditional regional
malls. Higher sales per visit, along with lower operating costs, have
made lifestyle centers very attractive.
The supercenter discount store trend came into its own from the
1990s to 2012. These stores compete for community shopping as well
as with regional shopping centers. These stores, which typically have
about 180,000 square feet of space, offer similar merchandise as large
community shopping centers and some low-end malls. Power centers
and big-box stores accounted for about 4.3% of all shopping center
space in 1983 and grew to 11.1% in 2012, showing the increased
popularity of this retail format.
Another trend during the 2005-2012 time frame was a surge
of smaller discount “dollar stores” that were dispersed throughout
moderate-income neighborhoods and small towns. In 2011, the
combined store count of the four national dollar store (or extreme
value) chains—Dollar General, Dollar Tree, Family Dollar and 99
Cents Only—surpassed that of the three biggest national drugstore
chains—Walgreens, CVS, and Rite Aid.2 The dollar stores took on the
larger supercenters, directly catering to some of their customer types,
offering some similar merchandise, and offering more convenience
by providing faster in-and-out shopping.
The latest retail trend to watch is online sales. Some market
observers think online retail might outstrip the demand for bricksand-mortar stores. However, at least at this time, online sales have
not fulfilled this prediction, but they are becoming more significant,
particularly for what are known as shoppers’ goods, one of the types
of goods discussed later in this chapter.3 One of the more current
trends in retailing is a combination store. This is a small store with
a display of all the retailer’s merchandise, such as clothes and shoes,
but only for direct observation of quality and style and for fitting
purposes. Any purchase is still delivered to the customer’s house,
whether the transaction occurs in the store or online. From 2000 to
2.
3.
“Dollar Days: How Dollar Stores are Growing in a Weak Economy,” white paper published by
Colliers International (2011).
Traditionally, the shoppers’ goods category was known as shopping goods, but a shift in usage
has occurred in recent literature.
Existing Shopping Center 235
2014, there was also a push toward online sales of convenience goods
like groceries, but this has not become widespread in 2014.
Exhibit 13.1 shows the overall market trend in online sales. As of
2014, experts say that most chains should have at least 10% of their
sales come from online sources. For example, Staples displayed one
of the highest rates of online sales, 42%, in 2013. At that time, the
rates at typical department stores, like Macy’s, were at 11%, with
stores like Wal-Mart coming in on the lower end at 2%.4
At each step in the appraisal process, an appraiser must remember
that retail centers have changed in the past and will continue to do so
in the future. Their dynamics may depend on changes in linkages to
demand and product distribution, in demographics, or in retail marketing techniques. Consequently, the changing nature of retail centers
forces analysts to reconsider their criteria for each assignment.
The challenge is to assess how the shopping center being valued
compares with competitive properties, both existing and anticipated.
Although current competition may be investigated directly, future
competition requires more study because of the ever-changing
nature of shopping centers. All of the retail dynamics of demand,
competition, and subject capture have a direct connection to the
valuation of the subject
shopping center
Exhibit 13.1 Online Sales in the United States
because the real estate
Year
Share of Total US Retail Sales
Share of GAFO* Sales
that houses retail
20000.9% 2.3%
activity is more valuable
20052.1% 8.1%
the more retail goods
20104.0% 14.0%
that are sold, and the
higher the price point
20124.9% 17.7%
of the goods sold, at that
Source: US Census Bureau and International Council of Shopping Centers
shopping center.
* GAFO stands for general merchandise, apparel, furniture, and other (electronics, etc.).
Section II. General Concepts of Retail Market Analysis
The first concept to understand about retail market analysis is that
demand comes from the customers in the trade area, not from the
shopping center, which means that a new or renovated shopping center cannot create new demand. A shopping center can only harvest
customers in four ways:
1. Attracting them from other competing businesses in the trade
area because of better linkages to customers, i.e., ease of access
2. Providing products that other shopping centers do not provide
3. Filling a vacuum created by obsolete buildings or by the competition’s marketing weaknesses
4. Realizing sales growth from new sources of demand entering the
trade area such as population growth
4.
Internet Retailer as reported in Dallas Morning News (March 24, 2014).
236 Market Analysis for Real Estate
The second major concept for appraisers to keep in mind is that
retail has traditionally followed, rather than led, community growth.
A shopping center is like a magnet—the more customers it can attract,
the better it will be. Thus, it needs households and linkages to those
households (or other demand sources such as daytime employment
in the trade area).
The next concept to understand is that the ability of a shopping
center to capture a share of market demand depends on the size of its
trade area and how the shopping center compares to its competition
in terms of the merchandise it offers, the physical and functional appeal of the retail outlet, and the shopping center’s linkages to customers. Thus, a market analyst must also consider the existing competition as well as planned and potential competition.
The retail cluster is another important concept. Clustering may
result when stores that sell similar but not identical goods (e.g., auto
dealerships, furniture stores, and appliance stores along arterial
streets) locate near each other to offer customers a wider selection.
Although the stores sell similar goods, consumers can differentiate the products of the different stores, and the storeowners believe
that the benefits of increased consumer traffic outweigh the negative
effects of proximity to competitors. This concept is also called the
principle of cumulative attraction, which recognizes that a location in
a retail cluster with similar but not identical retailers attracts more
customer traffic than a single retailer would.5
Shopping centers represent another type of retail cluster. A shopping
center usually contains stores that do not directly compete with one another, although some stores may sell products that are close substitutes.
Finally, the drawing power of dominant shopping centers is
subject to the principle of interception, or the principle of intervening
opportunities, which recognizes that most shoppers will not bypass
a dominant center to get to a subordinate center. These and other
concepts show how shopping centers differ from other types of real
estate. Moreover, the principles and concepts underlying the operation of shopping centers are not static. Additional specialty stores
and a broader product mix in community centers, for example, may
counteract the effects of the principle of interception.
The appraiser’s dilemma is apparent. In appraising a shopping
center, an appraiser must consider whether or not the subject real
estate is still competitive today and is likely to be in the future. If the
subject property is on the verge of becoming outdated, comparable
sales that are two or three years old may be of little use. The subject
property’s historic income may be misleading because future income
may be declining. Major renovation or alternative uses may have to
be considered. Thus, understanding the retail business and the real
estate product (the shopping center) that houses it is the key to estimating the subject property’s value.
5.
One of the first scholars to describe this concept and use this word was Richard L. Nelson in
The Selection of Retail Locations (New York: F. W. Dodge, 1958).
Existing Shopping Center 237
Types of Shopping Centers
Shopping centers are usually classified according to two criteria:
•
•
size in square feet of gross leasable area (GLA) and
their tenantry.
In this discussion, tenantry is synonymous with “products sold or services rendered.” A subcategory of tenantry is the anchor or principal tenant
and the tenant mix. Secondary criteria are drive time and customer base.
The principal determinants of the type of shopping center are the
tenants, the products sold, and whether the products are convenience
goods, shoppers’ goods, or specialty goods. Determining the type of
center is critical to a market study. The type of center establishes the
customer category and the distance that customers will travel to it. The
customer type and location determine, in large part, the trade area.
The trade area sets the limits of the demand calculations. Consequently, the leading edge of the market study is the type of shopping center,
as the center type dictates in large part the extent of the trade area.
The two major classifications of shopping centers are
•
•
convenience goods centers
shoppers’ goods centers
Shoppers’ goods centers are general merchandise stores that sell apparel and accessories, furniture, and home furnishings. They include
discount stores and other specialty stores. The industry code for these
types of stores is GAFO, which stands for general merchandise, apparel, furnishings, and other. GAFO stores sell merchandise normally sold
in department stores. Convenience goods stores include supermarkets
and other food stores, drugstores, home improvement stores, and
Exhibit 13.2 Retail Terminology
convenience goods
Commodities purchased frequently and without extensive comparison of style, price, or quality. That is, goods from drug,
grocery, liquor, and hardware stores, services from beauty, barber, and bake shops, and services from laundry and dry
cleaning establishments. Because the consumer purchases these “low-order” goods often, the quality of products and
their prices are well-known.
shoppers’ goods
Goods from variety, department, and general merechandise stores, e.g., clothing, furniture, and appliances.
specialty goods
Items that shoppers will take more care and spend greater effort to purchase.
GAFO stores include the following:
• General merchandise stores (NAICS 452)
• Clothing and accessories stores (NAICS 448)
• Furniture and home furnishings stores (NAICS 442)
• Electronics and appliance stores (NAICS 443)
• Sporting goods, hobby, book, and music stores (NAICS 451)
• Office supplies, stationery, and gift stores (NAICS 453)
238 Market Analysis for Real Estate
hardware stores. The marketing concept for supercenters (i.e., WalMart, Target, and similar stores) includes both shoppers’ goods and
convenience goods stores. Centers that specialize in selling primarily
shoppers’ goods find that their customers come from greater distances
than those for retail facilities that primarily sell convenience goods.
Traditional types of shopping centers include
•
•
•
convenience centers
neighborhood, community, regional, and super-regional shopping centers
specialty or theme centers
Variations and new types of centers are continually evolving. Some
examples are off-price outlets and discount centers, festival shopping centers, lifestyle centers, supercenters, hypermarts, supermalls,
power centers, and thoroughfare- or highway-related commercial
developments.6 (See Exhibit 13.3.)
Trade Area Concept Defined
A trade area (also called a market study area in some contexts) is defined as the geographic area from which a retail facility consistently
draws most of its customers.7 The definition’s focus is on the origination of most of the subject property’s customers and sales. However,
for the residual demand study of the market, the competition must
also be considered. In some instances, retail properties have two
market areas:
1. The origination point of most of the customers
2. The location of most of the competition
Thus, the trade area, in practice, is usually combined, forming the
overall market study area as defined by ULI:
The geographic region from which the majority of demand and the majority of competition are located.8
The extent of this area is the result of many factors, among them
accessibility, the extent of physical barriers, the location of competing facilities, and drive time. The usual focus of the market study is
known as the primary trade area, which is a subset of the trade area,
defined as “the geographic area around a retail facility from which
approximately 60% to 80% of the facility’s customers are drawn.”9
The next layer of the trade area is called the secondary trade area,
where about 15% to 20% of the sales are generated. The last layer is
the tertiary trade area, where an additional 5% to 10% of sales are
6.
7.
8.
9.
For a more complete description of retail types, see James D. Vernor, Michael F. Amundson,
Jeffery A Johnson, and Joseph S. Rabianski, Shopping Center Appraisal and Analysis, 2nd ed.
(Chicago: Appraisal Institute, 2009), 3-14.
The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
Adrienne Schmitz and Deborah L. Brett, Real Estate Market Analysis: A Case Study Approach
(Washington D.C.: Urban Land Institute, 2001).
The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
Existing Shopping Center 239
240 Market Analysis for Real Estate
Stores that sell convenience goods and stores that
provide personal services, e.g., dry cleaning, shoe
repair. A supermarket is often the principal tenant.
Stores that sell convenience goods, personal
• 100,000 to 300,000 square feet of
services, and shoppers’ goods, e.g., apparel,
gross leasable area
appliances. A junior department store or off-price/
• 10 to 30 acres (includes minimalls)
discount store is often the principal tenant. Other tenants include variety or super drugstores and home
improvement centers.
Neighborhood shopping center
Community shopping center
300,000 to 1,000,000 square feet of
gross leasable area
30 to 100 acres
Contains one or more department stores of at least 100,000 square feet
•
•
•
20- to 40-minute driving time
5- to 10-mile range
150,000 to 400,000 potential
customers
• 5- to 20-minute driving time
• 3- to 6-mile range
• 40,000 to 150,000 potential customers
• Less than 5-minute driving time
• 1- to 1½-mile range
• 5,000 to 40,000 potential customers
• Less than 5-minute driving time
Trade Area
Name brand outlet stores or wholesale grocery and
hardware stores.
Convenience stores, fast-food restaurants, car
dealerships, and service stations.
Motels, restaurants, truck stops, service stations; may • Varies
• Passing motorists in need of highwaystand as a single establishment within a cluster of related services
other highway-related service facilities.
Off-price outlet and discount center
Strip commercial (a contiguous row or strip along a main thoroughfare)
Highway commercial
• Varies according to trade area
• 60,000 to 400,000 square feet
A minimum of three, but usually five or more, anchor
• Typically open-air centers of more
• A minimum of 15 miles—typically a tenants that are dominant in their categories. than 250,000 square feet 20-minute range and a population
• Almost all space designed for large tenants of 400,000 to 500,000
Power center
• Neighborhood or community
• Similar to super-regional center
• Similar to regional shopping centers
Stores that sell upscale home furnishings or women’s • 300,000 to 500,000 square feet
fashion, department stores, and restaurants.
• Similar to that of a regional shopping
center
Lifestyle centers
• Same range as a neighborhood or
community shopping center
Boutiques and stores that sell design items, craft
wares, and gourmet foods. A high-profile specialty
shop is often the principal tenant. Festival malls
and fashion centers are types of theme centers.
Specialty, or theme, center
Super-regional shopping center
Stores that sell general merchandise, apparel,
• Over 800,000 square feet of gross
• In excess of 30-minute driving time
furniture, home furnishings, and services as well
leasable area
• Typically 10- to 35-mile range
as recreational facilities.
• Contains at least three major • Over 500,000 potential customers
department stores of at least 100,000
square feet each
Regional shopping center
Stores that sell general merchandise, shoppers’
•
goods, and convenience goods. One or more
department stores are the principal tenants.
•
•
• 30,000 to 150,000 square feet of
gross leasable area
• 4 to 10 acres
• Less than 30,000 square feet
Stores that sell convenience goods, e.g., groceries,
pharmaceutical; not anchored by a supermarket.
Size
Tenantry
Convenience center
Principal Types of Shopping Centers
Type
Exhibit 13.3 generated. For a typical shopping center, this accounts for about 95%
of sales. The sales from other various sources usually are not well defined. The customer base for each layer of a trade area can reside in
the area or can be derived from nonresident groups in the area such
as daytime employees, tourists, and other groups who live outside the
area but who regularly frequent the subject trade area.
Different types of shopping centers have distinctly different tenant
compositions and trade areas (see Exhibit 13.4), and some important industry terms pertaining to shopping centers are defined in Exhibit 13.5.
The general guidelines for delineating the trade areas shown in
Exhibit 13.4 must be modified to fit the characteristics of the specific
shopping center, primarily as they relate to the type of products sold,
the linkages to its customers, and adjustments for competition. Detailed
discussion on procedures for defining the trade area is presented in the
case study section of this chapter covering Step 2: Delineate the Market.
Exhibit 13.4 Trade Area Breakdown by Total Sales and Driving Time
Neighborhood shopping centers
Community shopping centers
Regional shopping centers
Super-regional shopping centers
Primary Trade Area*
Under 5 minutes
5 to 20 minutes
20 to 40 minutes
More than 40 minutes
Secondary Trade Area†
5 to 15 minutes
20 to 35 minutes
40 to 60 minutes
Tertiary Trade Area‡
* The geographic area immediately adjacent to the facility from which approximately 60% to 80% of its customers are derived
† The geographic area adjacent to the primary trade area from which an additional 20% to 40% of the facility’s sales/customers are derived
‡ The farthest outlying segment of the trade area from which the remaining percentage of the facility’s sales/customers are derived
Exhibit 13.5 Building Terms
gross leasable area (GLA)
The total floor area rented to tenants, including basements and mezzanines. Gross leasable area is measured from the
outside wall surface to the center of interior partitions.
gross building area (GBA)
Gross leasable area plus all common areas.
gross sales area (GSA)
Gross leasable area minus storage and work areas.
sales per square foot
The annual store sales divided by the floor area that generates the sales. The number is used in the market analysis
calculation to convert economic data to real estate. It is important to identify the type of floor area measurement used
in the economic data. Most survey data uses sales per gross leaseable area to the tenant (GLA).
common area
The total area within a property that is not intended for sale or rent but is available for common use by all owners, tenants, or their customers, e.g., mallways, parking, and restrooms; not included in gross leasable area.
parking area
The area of a facility designated for parking employees’ and customers’ cars, including parking surface, aisles, stalls, and
islands.
parking ratio
The ratio of parking area to GBA or GLA. This figure is used only as a rough estimation of the parking area needed.
parking index
The number of car parking spaces per 1,000 square feet of GLA.
Existing Shopping Center 241
Section III. The Market Analysis Process for a Retail Center
Exhibit 13.6 is an overview of a Level C market and marketability
analysis of a shopping center. The six-step process includes
•
•
•
•
•
•
analysis of the subject property
analysis of the subject’s trade area
an estimate of existing and potential demand
an inventory of competitive supply
analysis of market equilibrium
the estimated subject capture
The six-step market and marketability analysis provides essential
data used in the highest and best use analysis and, in turn, the application of the three approaches to value. Each of the six steps is
divided further into substeps. For example, the ten substeps of Step
3.3, identified as Steps 3.3(1) through 3.3(10), describe the segmentation process used to estimate demand in the retail center’s primary
and secondary trade areas. The case study application follows the
sequence of steps shown in Exhibit 13.6.
The forecast capture rate for the subject property is then employed as a basis for the highest and best use conclusion. In particular, a forecast of timing is needed to test financial feasibility. Forecast
capture is also essential data in the three valuation approaches, such
as the revenue forecast for the income capitalization approach.
Section IV. Case Study
The case study that follows is an application of the six-step process
to a valuation appraisal of a specific retail property. The case study is
based on an actual market value appraisal. General procedures for
each step are introduced and then applied to the case study, and the
application of the market analysis procedures is shown as it appeared
as part of the market value appraisal. Some parts have been abbreviated for purposes of illustration and some descriptive text has been
added about the procedure for explanatory purposes.
The purpose of the original appraisal was to lend support to the
highest and best use conclusion and to furnish information for the
valuation approaches applied to the market value opinion. The question of use is not a major element of this study because the subject
retail center is relatively new and currently occupied. The value of
the land as though vacant is far less than the value of the property
as improved. Alternative uses that would require remodeling are not
feasible. Thus, the analysis of highest and best use as if vacant would
be a minimal, Level A study because it is not critical to the overall
property value conclusion. Thus, for brevity, the Level A analysis of
highest and best use “as if vacant” is not shown here.
In this case study, the portion of the original appraisal that has
the most significant effect on value is the ability of the subject prop 242 Market Analysis for Real Estate