session plan chapter nine: – retail and office properties as an investment alternative – discuss...
Post on 23-Dec-2015
213 Views
Preview:
TRANSCRIPT
Session Plan
Chapter Nine:– Retail and Office properties as an investment
alternative– Discuss two retail and two office cases– Mini-Case on the DCF
Office Vs. Retail
Customers of tenants in office space visit the property due to having appointments
Retail customers typically are spur of the moment visitors so the location is much more important for retail vs. office– Ingress: Entrance into the property– Egress: Exit from the property
Both should be clear, visible from the road, and located near major roads and other retail shopping centers
Office Characteristics
Class A, B, & C – specifies features based on construction materials
used, floor and roof structures, fireproofing, quality of interior finish/amenities, and location
Class A is typically skyscraper quality– Reinforced concrete framing, superior location and
access, good condition and professional management Class B is typically suburban office buildings, with brick
façade, and professionally landscaped Class C is typically older (15-25 years), block walls, notable
physical deterioration (or converted retail space)
Other Office Characteristics
Could be a medical office building– Should be located near the hospital
Could be a professional office building– Should be located in office park or in neighborhoods
of similar quality and utility– Should be located near residential areas where
employees of the tenants live
Could be a downtown office building– Should have adequate parking, be near hotels,
restaurants, and have good access from major highways
Office Definitions
Gross Building Area– Total square footage of the building, measuring from
outside wall to outside wall
Net Rentable Area– The actual useable area. The gross area less areas
not rented by tenant (restrooms, public corridors, janitor closets, etc.)
Absorption– the net amount of additional office space that is leased
in a year’s time. Can be positive or negative (if new product is built but not leased)
Office Considerations
Asbestos has been a major problem in attaining financing by commercial banks
Should consider the age and condition of the elevators
The age and efficiency of the HVAC, roof, and the utilities
Lease terms are typically 3-5 years Tenants include doctors, lawyers, insurance,
banks, other service sector employment
Retail Properties
As mentioned earlier, retail properties are more dependent on the whims of the customers (rather than appointment oriented)– Nothing like that appointment at McDonald’s!
Anchor tenants– National or regional chain store that is the primary
draw for customers to the property
In-Line tenants– Supporting players relative to the anchors
Domino Clause
Most retail leases will specify that if the anchor tenant leaves, the other supporting tenants have the ability to break their leases early (for a fee)– Also known as a “Go Dark Clause”
Sales per square foot– This is a key measure of performance for retail
tenants. Investors can request last few years of sales history to gauge success at location (and the probability that a tenant will renew their lease)
Types of Retail Properties
Neighborhood Center– Shopping center containing up to 150,000 sq.ft. of
leasable space– Typically will have an anchor (Food Lion), strong
supporting players (Dollar General), and local mom & pop tenants (local nail salon or local restaurant)
– There are many of these in most communities– Should determine if the property is experiencing a
positive trend line or a negative trend line
Types of Retail Properties
Unanchored Center– A retail strip center which is smaller than a
neighborhood center: does not have a primary tenant
– Think of some of near campus
Outparcel– Separate tract of land at front of shopping center– Typically includes a restaurant, bank, or movie
theatre
Types of Retail Properties
Regional Center– A large mall containing 400,000 square feet of
leasable space (and above)– Usually has one to three major department stores– These types of properties are typically too large
for the average real estate investor– Also require a lot of maintenance and property
management due to the size of the property
Various Shopping Centers
Primary
Type of Shopping Center Size (Sq. Ft.) Anchor Ratio Trade Area
Neighborhood Center 30,000-150,000 30-50% 3 miles
Fashion/Specialty 80,000-250,000 30-50% 5-15 miles
Community Center 100,000-350,000 40-60% 3-6 miles
Regional Center 400,000-800,000 50-70% 5-10 miles
Power Center 250,000-600,000 70-90% 5-10 miles
Super-Regional Center (Mall) 800,000 + 50-70% 5-25 miles
Changes in Shopping Center Returns
Key Factors:– Competition entering market– Outdated design and layout– Changes in trade area income levels– Changes in population density– Changes in highway construction/traffic patterns
Projecting Retail Demand
Primary Trading Area: Measure of potential revenue of tenants in property from geographic boundary where 60-80% of sales in a given area originate– Based on property size, goods/services offered,
population density, & transportation facilities More competition equals lower possible revenue
Good for choosing locations in a given market
Location of Retail Properties
Should be near residential neighborhoods Building should be facing the road vs. perpendicular
to the road Should be located at an intersection
– Stop light is a big plus Should be convenient to major highways
– For both consumers and product deliveries Going Home side of the road (groceries) Going to Work side of road (coffee, bakeries)
Common Area Maintenance (CAM)
Typically landlords require their retail tenants to pay for their own utilities, and tenants typically will pay for taxes, insurance, and maintenance of the property on a pro-rata basis.
The landlord pays for these expenses, and then is reimbursed by the tenant– All of this is spelled out in the leases.
Second Story Retail?
This is very hard to lease Customers do not want to climb stairs or take elevators
in most cases Sometimes what was supposed to be second story retail
space is converted into office space or possibly apartments
In some metro locations, two story retail space is successful– Fort Lee, NJ example– St. Catherine’s Street in Montreal
Retail Tenant Mix
Tenants vary from grocery store chains, drug stores, dollar stores, restaurants, hobby stores, etc.– Which drug stores will survive?
How would you find out about the financial strength of the tenants?
When would be a crucial time to find this out?– Remember QQD here….
Tenant Improvements & Leasing Commissions in DCF
Tenant Improvements:– Estimate probability of renewal vs. new lease and
the costs per square foot for each– Calculate weighted average of above x sq ft of
space– Include inflation/growth factor depending on when
in holding period expense is estimated to occur
Tenant Improvements & Leasing Commissions in DCF
Leasing Commissions:– Estimate probability of renewal vs. new lease and the costs
as % of EGI for space– Calculate weighted average of above x % of EGI of space x
length of lease– No inflation/growth factor as this is included in DCF
estimation of EGI for a given year
Should survey market averages for inputs to include cost of renewal and new lease and length of leases
top related