Is the Price Right? Retail Valuation Shows Ties to Education, GLA
- May 01, 2009
Retail property owners in Atlanta have done a lot more head scratching than trading in the past year. Even if debt had been more readily available, the virtual absence of local sales comparables would have made it almost impossible to price assets, noted Jones Lang LaSalle Inc. managing director Kris Cooper. “It caused not only us but also sellers and owners a huge challenge,” he observed. The often unanswerable question, he explained, was, “How do (you) value that property?”Countless investors, developers and lenders around the country could echo the frustration of Cooper’s clients. But the issue of valuing retail properties is finally beginning to emerge from the shadows. Hundreds of retail assets could come to market during the next several years under circumstances ranging from bankruptcy-related forced sales to debt-reduction strategies, with a need to determine value in order to sell such properties to those opportunistic buyers able to snap them up. Already, the plights of two major developers are promising to bring this issue to the fore.In mid-April, a joint venture of Macquarie Group Ltd. and Developers Diversified Realty Corp. threw the issue into high relief by putting a 52-property, 20-state portfolio of community centers on the block. The team representing the sellers—Holliday Fenoglio Fowler L.P., Macquarie Capital Advisers Ltd. and UBS Securities L.L.C.—placed the portfolio’s aggregate asking price at $1.9 billion.Looming even larger over the retail investment landscape is General Growth Properties Inc.’s bankruptcy filing. Immediately following the bankruptcy announcement, company president & COO Tom Nolan insisted that no fire sale was imminent. However, speculation continues that the REIT will wind up selling some prize assets, perhaps to a well-financed competitor like Simon Properties Group Inc.The Macquarie-Developers Diversified and, most likely, General Growth portfolios will represent some of the largest and the highest-profile of hundreds of retail assets that could provide opportunities during the next several years. Yet whether deals involve individual centers or a multibillion-dollar portfolio, the market value of retail properties often remains elusive for sellers and buyers.Although the valuation of high-profile assets like these will become an issue for those who buy and sell them, opinions differ as to how soon they will set benchmarks. Some experts believe that such sales will help break the logjam that is the bid-ask gap, while others are prepared for a longer wait. “It’s going to take a while,” argued Bernard Haddigan, senior vice president & national director of retail for Marcus & Millichap Real Estate Investment Services Inc.Meanwhile, investors and their advisors must look to other indicators for guidance in assessing retail property values. As industry veterans point out, a property’s net operating income has replaced more speculative measurements like projected long-term upside as the single most important factor in determining a property’s performance.Generating ValueOf all retail fundamentals, occupancy offers the single best indicator of a center’s ability to produce revenue, and, in turn, to generate value, contended Terry Munoz, vice president & industry practice leader for market research and consulting company Nielsen Claritas, CPN’s partner in this series of special reports and, like CPN, a member of The Nielsen Co.A recent analysis by Nielsen Claritas suggests compelling—and sometimes surprising—links among key demographics, vacancy and center size. “Transaction information is now tied to market intelligence definitively,” Munoz argued. The study shows a strong association between a single supply variable—gross leasable area—one demand-side variable—college education—and variations in vacancy for centers of at least 250,000 square feet. The study focused on this size because the scale requires higher stakes and greater complexity for owners, prospective buyers, lenders and other stakeholders.Remarkably, the Nielsen Claritas analysis points to a specific proportion of college-educated households in a given market, 27.7 percent, as a dividing line. Drawing on vacancy data provided by CoStar Group Inc., the research reveals a 200-basis-point variation in vacancy rates between centers in areas with proportions below and above that level. More specifically, the 69 Core Based Statistical Areas (federal delineations of economic areas) with fewer than 27.7 percent of households that include at least one college graduate sported an average vacancy rate of 7.1 percent. The 32 markets above that dividing line harbor an average vacancy of 5 percent.A large proportion of highly educated households has long been one of the qualities desired by retailers and owners, particularly for larger and higher-end centers, but the Nielsen Claritas research takes that assumption one step further and indicates that college education could also be an early indicator of vacancy variations or fluctuations.Drilling down an additional level, the researchers discovered that a market’s college education levels provide a still more refined indication of vacancy when tied to a baseline statistic: gross leasable area per person.In the 13 CBSAs that combine college-education levels of more than 28 percent with GLA levels below 10.2 percent, the average vacancy rate is 4 percent. For the 19 high-college CBSAs where the median per-capita GLA is more than 10.2 percent, however, average vacancy jumps to 6.3 percent.And on the flip side, occupancy levels in larger centers appear to face the greatest challenges in those markets where a relatively low incidence of college graduates is combined with a high average inventory. In the 41 CBSAs where the median level of college-educated households is below the 28 percent threshold and per-capita GLA is also greater than 9.7 percent, average vacancy rises to 7.9 percent, whereas the 28 lower-education areas sporting lower per-capita GLAs averaged a vacancy rate of 6.2.The study does not call for immediately writing off large centers in markets where college graduate levels slip below the 28 percent threshold or where the per-person inventory of space inches above a certain level. However, as investors, owners and advisors take up the task of valuing large centers, the Nielsen Claritas research results underscore the leading roles of education and GLA in determining occupancy and, by extension, a large retail asset’s value. In a market where many standard guideposts for valuation seem to have fallen away, these are valuable benchmarks in the complex process of determining investment strategies.—Reach retail editor Paul Rosta at email@example.comInterpreting the DataTo identify the connections between property valuation and demographics discussed in this report, Nielsen Claritas evaluated data from multiple sources, including its proprietary PopFacts demographics database, as well as vacancy data from CoStar Group Inc., the Bureau of Labor Statistics and the Census Bureau. In order to effectively compare data from these disparate sources, researchers elected to use Core Based Statistical Areas. Established by the federal government, CBSAs incorporate a core urban area together with surrounding areas that are linked geographically and economically.The analysts used statistical techniques to determine which indicators explained variations in vacancy, the best indicator of net operating income and, therefore, asset value. Focusing on centers of at least 250,000 square feet, Nielsen Claritas studied multiple demographic and economic factors, among them employment, household income, population density and total retail sales. As noted in the main article, the researchers found a striking relationship between CBSAs’ vacancy rates and a combination of education levels and gross leasable area per person.The size of the population and geographic areas represented by the largest CBSAs can make it difficult to drill down to the local level. To supplement their analysis of CBSAs like those anchored by New York City
, Los Angeles, Dallas, Houston, Chicago and Miami, Nielsen Claritas also provided a county-level analysis of education for more than 49 counties that comprise larger CBSAs.Visit www.cpnonline.com/datacenter for more information about how some of the nations largest counties stack up.