we think of shopping, we think of malls. But we do much more of our
shopping in neighborhood centers than in malls. Investors do much more
of their investing in neighborhood centers. Appraisers do much more of
their appraising there, too.
Neighborhood centers are multi-tenant retail buildings at the low end
of the size spectrum. A neighborhood center may have a grocery store as
its anchor, or it may have no anchor at all. Traditionally, a
neighborhood center was designed to serve a local neighborhood, with a
slot for the dry cleaner, one for the baker, one for the hair salon,
and one for the bank. Over the years, that concept was stretched.
Today, a neighborhood center is as likely to be on a main drag between
the Lowe's and the WalMart as it is to be in an out-of-the-way village.
Both are "neighborhood" centers. What they have in common is that they
The value for a neighborhood center has everything to do with rent and
little to do with anything else. Two neighborhood centers may be
physically identical, but if one is exposed to very low traffic and the
other faces a high-traffic main road, the fact that the first one may
have sold for $100 per foot likely says very little about the value of
the second. That isn't true of offices, apartments, or industrials. It
is only true of retail. A retail building may be the shabbiest shack,
but if it generates high sales volume for its occupants, it is worth
far more than the shiny, new center on the wrong road.
The Dollars and Cents of Shopping Centers reports that the average
tenant in a neighborhood center in the U.S. does business at the rate
of about $300 per square foot of space. In the East, that average
tenant pays rent of about $13.00 per foot, or 30% more than at other
U.S. locations. The center experiences expenses, but the owner is able
to bill back about 75% of those to the tenants. That is one of the
attractions of retail: the net lease. Another is stability. REIS, Inc.
surveys the retail market in Greater Boston and nationwide. It reports
a growth rate for retail rents at about the rate of inflation over the
past five years and forecasts growth at about 3% per year through 2010.
Retail rents may be stable, but they vary by location. Around Greater
Boston, the North Shore experiences retail rents 34% higher than the
South Shore and 7% less than Metrowest. But though local areas may vary
in terms of rent, on average, they experience rent growth at about the
Retail is stable in terms of rent, and it is stable in terms of
vacancy, with vacancy in neighborhood centers in Greater Boston
reported by REIS at 4.4%. Vacancy is lower in Greater Boston than for
the U.S. as a whole, and the forecast through 2010 is for little
change. The main excitement for investors in retail has been a growth
in value of 25% resulting from a decline in interest rates (and,
therefore, capitalization rates) since late 2003.
The key data for an appraisal of a neighborhood center is the level of
rent in that center's immediate surroundings. Within a given
neighborhood, retail rent, like water, seems to seek one level. In a
suburban pocket, that may be $22.00 per foot, and in Harvard Square, it
may be $100.00. Within the neighborhood, the variation around that
predominant rent is typically small. The main task for an appraiser of
a neighborhood center is to discover the neighborhood's predominant
rent. That may be accomplished by means as easy as consulting a
published rent survey. Or it may mean applying the old-fashioned
method: knocking on doors.