Shopping Center Real Estate Appraisal

Shopping Center Appraisal and Analysis

Shopping center appraisal and analysis, and the retail real estate appraisers who produce them, have many value components that need to be considered before providing an opinion of value for a particular retail property. Central to the evaluation is consideration of the type of building being appraised, and the property rights being valued, (fee simple or leased fee). Other concerns might involve a ground lease, or an "as is" or an "as if complete" value, depending on the assignment.  Other issues may be considered, as outlined below. 

Retailing as a Concept

Brick and mortar (vs) online

Retail is the effort to sell goods and services to customers with the intent of making money.  In the US, retailing is expected to be $6 trillion dollars in 2023.  Of those purchases, ecommerce sales are increasing as much as 15% per year. 

Amazon started in 1995 as an online bookseller.  In 2019, it had sales of $280 billion, up 20% from 2018.  As an example of the change is shopping habits, over 77% of shoppers use mobile devices when searching for products to buy. As a result, digital ads make up 70% of retail ad spending in a year.

But brick and mortar stores still dominate retailing, with over 80% of the retail market, and with steady sales volume increases over the years, in spite of online sales, (increasing 2% in 2019).  And although ecommerce sales are increasing, a good percentage of those "ecommerce" sales reflect, at least in part, efforts of brick and mortar stores to sell goods online as well, (Target, WalMart, Kroger, Kohl's, Costco, Best Buy, to name a few).  

Given that brick and mortar stores still dominate the retail sector, it is useful to discuss the most common types of retail stores, what they bring to the market, followed by ideas on how to value them.

Synergy or Cumulative Attraction

Synergy of tenants

Brick and mortar retailers have found that it makes sense to surround themselves with competitors that sell similar, but not identical, goods.  They do this because retailers have found that by being in close proximity to other retailers, their total number of customers increase, and with increased customers, revenue increases.  This clustering is called the "principle of cumulative attraction", and was a premise advanced by Richard Nelson in this book, The Selection of Retail Locations.  Examples can be seen in auto malls, which tend to cluster together, or food vendors at the food court of any mall or airport, or fast food restaurants at the intersection of arterial streets.  Specifically, retailers have found that shopping centers increase sales.  Over the years, many types of retail shopping centers formed, each with their own unique characteristics. They will are discussed in briefly below. 

Shopping Center

Shopping Centers 

According the the Urban Land Institute, "a shopping center is a group of commercial establisments that are planned, developed, owned, and managed as a unit related in location, size, and type of shops to the trade area it serves. It provides onsite parking relating to the types and sizes of its stores".

A shopping center is more than a bunch of stores. Shopping centers have a particular design and site plan, with ample parking. Delivery and service areas are typically in the back, away from fronting streets. The center typically has professional management which works with tenants to develop policies beneficial to the sucess of the entire center.

Shopping center tenants are selected by management with the hope of balance and synergy between tenants, with the goal of increasing revenue for each. When synergy is successful, the landlord can get revenue increases from percentage leases from tenants.

Shopping Center Criteria

Useful criteria used to classify shopping centers into particular categories include:

Shopping Center Size

Shopping center size can best be measured in GLA, (Gross Leasable Area). As a general rule, neighborhood centers are the smallest, followed by community centers, regional centers, and superregional centers. That said, there is no clearly defined criteria between the different categories, with industry participants calling a 100,000 SF shopping center a neighborhood center, and another 100,000 SF center down the road as a community center.

Anchor Tenants

Anchor Tenants

Anchor tenants are typicall considered to be the traffic generator of the shopping center. The anchor will generate the largest number of customer visits, and because of these visits, is generally considered to be strong enough to be a stand alone. The type of anchor depends on the shopping center. Typically a supermarket would be an anchor of a neighborhood center, or a large department store in a regional shopping center.

Merchandise Sold

Shopping centers can be categorized by the type of products sold at the stores in the shopping center. Convenience items are goods that are needed and purchased frequently, without much price or style comparisons by the consumer. These convenience products include food, Over The Counter drugs, (OTC), prescription drugs, personal care products, household products, and personal services like nail or hair salons, and barber shops.

Higher order goods are more expensive, with the consumers making fewer purchases of these prodcuts,and doing comparative shopping when they do. These purchases take more time and effort on the part of the consumer. Examples would be apparel, linens, bedding, towels and other fabric products. Shopping is usually a part of the experience for consumers purchasing more durable goods, like appliances , furniture, or some hardware products.

Site Size

The size of the shoping center land is a consideration in shopping center classification. Neighborhood shopping centers have the smallest sites, generally at least 3 acres, while supperregional shopping centers can have 60 acres or more.

Distance Traveled by the Customer

The distance or travel time from the customer's home is an appropertie measure of shopping center classification. Neighborhhod shopping centers have customers with the smallest travel time. Regional shopping centers by comparision, often attract customers who are willing to travel much greater distances.  

Customer Base

Customer base refers to the number of surrounding population that supports the center. Neighborhood centers with a grocery anchor require less customer travel time compared to regional shopping centers, with customers willing to spend much more time getting to the center, but usually with more infrequent visits.

Shopping Center Type Chart

Traditional Shopping Center Types

Using the criteria listed below, the Urban Land Institute categorizes shopping centers as follows:

Convenience Shopping Center

A convenience center provides the sale of convenience goods, and contains at least three stores, with a gross leasable area (GLA) of up to 30,000 SF. It can be anchored by a minimart.

Neighborhood Shopping Center

Neighborhood Shopping Center

Much like a Convenience Center, a Neighborhood Center provides the sale of convenience goods like groceries, drugs and other soft goods, as well as personal services like laundry, dry cleaning barber or hair salons, and nail salons. These services are provided for the day-to-day living needs of the immediate neighborhood. Typically these centers are built around grocery stores, with a GLA of about 60,000 SF. The in-line mom & pop space can be extensive, but the total GLA of the center is usually between 60,000 SF to 100,000 SF.

Community Shopping Center

A Community Center or a Super Community Center is larger than a Neighborhood Center , but still does not have a traditional shopping center. In addition to the store mix typically found in a Neighborhood Center, the Community Center might also have a larger array of stores selling clothing, home furnishings, home improvement, hardware, and other specialty retailers. In addition, the Community Center may offer banking and professional services, personal services or have a super drug store. Within the Community Center are synonymous names. Synonymous names for Community Center are:

Power Center monument signage

The size of a Community Center is approximately 180,000 SF of GLA, but can range from 100,000 SF to 500,000 SF. Within the category of Community Center is the Power Center, which is a type of Community Center. Power Centers can be distinguished by containing at least four different category specific anchors of 20,000 SF or more. These 4 anchors often sell hard goods like consumer electronics, sporting goods, office supplies, or furniture, and are sometimes considered "category killers", (no similiar retailers dare compete). However some Power Centers can include warehouse clubs and discount department stores. These anchors typically occupy 85% of the space, with little room for smaller mom & pop stores in adjacent in-line suites.

Community Centers attract customers from within a five mile radius, and who are willing to drive 10 - 20 minutes to get to the center.

Regional Shopping Center

Regional Shopping Center

A Regional Shopping Center has tenants that sell all varieties of merchandise, including clothes, furniture, as well as services and recreational facilities. Anchor tenants include at least two large department sotres, of at least 50,000 SF each. The typical size of the entire build-out is 500,000 GLA, but can range from 250,000 SF to 900,000 SF. Regional Shopping Centers have sometimes decimated traditional downtown business districts. As a result, Regional Shopping Centers often provide services similiar to what the traditional downtown used to have. They attract customers from as far as an 8 mile radius who ware willing to drive 20 minutes or more to get there.

Super Regional Shopping Center

A Super Regional Shopping Center have all the things that Regional Shopping Centers have, but they are built around three or more full line department stores generally at least 75,000 SF each. The typical size of a Super Regional Shopping Center is 1,000,000 SF of GLA, but thy can range from 500,000 SF to 1,500,000 SF.