Chapter 9 - Extra Materials

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25 Νοε 2013 (πριν από 4 χρόνια και 5 μήνες)

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Session Plan

Chapter Nine:

Retail and Office properties as an investment

Discuss two retail and two office cases

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
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

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.)


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

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

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

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

Think of some of near campus


Separate tract of land at front of shopping center

Typically includes a restaurant, bank, or movie

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


Type of Shopping Center

Size (Sq. Ft.)

Anchor Ratio

Trade Area

Neighborhood Center



3 miles




15 miles

Community Center



6 miles

Regional Center



10 miles

Power Center



10 miles

Regional Center (Mall)

800,000 +


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

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

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

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

End of Session: