Of the many methods of valuation, the appraisal profession is looking at what is being implemented by the retail sector. These properties would include enclosed regional malls, urban retail, multi-use properties and the potential re-usage of empty big-box stores.
“There has been a large increase in transactions involving secondary and tertiary malls in the last nine to 12 months, given the loosening of attitudes on the part of the sellers as to what these properties should sell for,” Cushman & Wakefield Executive Managing Director Richard Latella told Valuation Review.
As for other multi-use properties, including the big box stores, Latella sees a pattern of errors and assumptions made by some appraisers.
“The common mistake appraisers are making is when they estimate market rent on some of these box stores that have gone dark,” he said. “Appraisers shouldn’t be comping them out with second generation rents and not the first generation build to suit rents that may reflect a developers return for a specific retail build out. “If a space goes dark and the owner has to get a replacement renter, the appraisal based on second generation comps will tend to show a much lower rent. That’s a common appraisal problem that I’ve seen,” Latella added.
Integra Realty Resources Principal Michael Amundson says the ability to go “above and beyond” will benefit the appraiser in evaluating retail land.
Amundson notes stores like Target and Walmart have expanded into full-service groceries which has made them one-stop shopping destinations and that these types of retailers are also trying new formats like neighborhood stores or moving into nontraditional downtown locations.
“Appraisers should get to know the people who are buying, selling and leasing retail space. Those people are using detailed demographic analysis, trade area purchasing power and retail gap analysis, which is looking at what sectors of retail trade are oversupplied in a market versus undersupplied,” Amundson said. “That’s the language that retailers doing the deals are speaking and it’s important to learn and understand that language. Appraisers should also take advantage of analytical tools employed by retailers. There’s a little bit of a learning curve but your analysis and therefore reports and conclusions are going to be much stronger.
“It’s difficult to appraise industrial property for a month then jump into retail,” Amundson added. “There are too many changes involved in this industry and not enough time available given the faster turn times for appraisals for analysts to learn and get ‘up to speed’ so that they can produce reliable appraisal reports.”
The misconception still remains that these retail properties will cease to exist. And while clearly some of the retail stores in America are indeed shrinking, they are not all going away. Latella stated that Cushman & Wakefield’s Retail Research Group forecasts, there will be an even higher number of store closures next year.
He also said these changes appraisers are dealing with in the broad retail world are good opportunities to promote the profession.
“In a period of change, the need to have good professional advice is something that would be very important to our clients and it should be embraced by the appraisal industry,” Latella said. “People coming into the profession over the last seven-to-nine years, post-recession, have seen things moving in only one general direction. While There have been speed bumps, for the most part we have seen an upward trend of NOI and valuations. The market is in a period of pause and reset but appraisers must recognize that property sectors often run in tandem and do operate under its own set of fundamentals. For example, we see the industrial side of things getting strong partly because of shifts in retail.
“The retail issue has benefitted industrial. No question,” Latella added. “I believe good, sound training of professional valuers is most important, especially when the industry experiences a period of change. Everything is not going up, and there are reasons why these changes happen. The understanding of these changes, and why they occur and the effect these changes have on value, is the time to emphasize more training for appraisers.”
Amundson says that the appraisal profession may need to accelerate its efforts as far as specialization.
“I would agree that retail can provide more opportunities for appraisers but I believe the profession is slow in terms of overall specialization, which is what appraisers would need to do in determining value consistently in retail,” he said.” For example, there needs to be an understanding of occupancy cost ratio and sales trends by appraisers for these types of special valuations.
“Specialization, though, is easier to do in much larger markets,” Amundson added. “Places like Dallas, Houston and Chicago, where there is so much property, so many transactions and ownership disputes, allowing for more opportunity to specialize and make a living. You can make a consistent living, for example, evaluating hotels as long as you’re willing to travel.”
Appraisers, according to Amundson, should keep an eye on the moves that retailers make in response to the industry’s challenges, and understand that retailers are a resilient group.
“Retailers are amazing in that they are always coming up with innovations to attract the customer, and they often surprise everyone with new concepts and ideas,” he said.