Chapter 9 - Extra Materials

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25 Νοε 2013 (πριν από 3 χρόνια και 11 μήνες)

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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


End of Session: