The community center is a form of retail outlet that
became dominant in suburban America in the 1950s. Massachusetts alone has
50 million square feet in 258 centers. A community center typically has
a junior or discount department store and a super market for anchors, with
these taking up half the center's space. Though designed for an earlier
era, the community center remains viable: the nation will build another
six million square feet in the next four years. To properly value a community
center requires an understanding of a property's individual strengths and
Demand is from two sources: consumers and retailers. Demand for retail
real estate is distinct from that for other investment property because
it has two components: primary tenant demand (stores) and secondary shopper
demand (customers). A host of demographic and economic influences (job
growth; household composition; household income; disposable income) drives
shopper demand. For Greater Boston, growth as projected by NPA Data Services
is expected to be a moderate .4% to .7% per year for population, households,
and income over the next five years.
Primary tenant demand is led by anchor tenants. The long term viability
of anchors is what underpins value. The new, dominant force in the retail
marketplace is the "big box" user the wholesale club, like BJ's,
and the "category killer," like Home Depot. These have created
a battleground among retailers, where new centers are built even as older
centers seek tenants. In competition with the big boxes, older style anchor
stores often benefit from a strong, established location and low rent.
With their anchors at low rents, however, community center owners are pressured
to negotiate ever higher rents from smaller tenants which becomes problematic
as the universe of the smaller tenants declines.
Key lease language is crucial to risk. Operating covenants that require
continuous operation affect a center's viability. Long term leases require
scrutiny for appropriate default and "escape clause" language.
A "dark" anchor can devastate an otherwise healthy center. In
view of the recent history of overly aggressive projections, it can be
said that this risk is not easily assessed.
To properly evaluate risk requires evaluation of the anchor tenant.
Dominant anchors will attract an array of credit worthy satellite stores.
The durability of the income stream is reflected in the "location
linkages" transportation arteries and patterns of growth in population
One anecdote aptly sums up the result of projections gone awry. In 1987,
before the market crash, a consortium of pension funds invested $2.7 billion
in Cadillac Fairview, a major retail developer based in Canada. The anticipated
rental growth rate was projected to range from 6% to 7% per year, with
an annual internal rate of return of 14%. Instead, income from rents ceased
in 1990, at $225 million. Vultures later purchased what was left of the
assets for $350 million. History of this kind teaches that investment in
real estate can be as volatile as in any other vehicle. The skilled retail
property analyst factors a wide range of information before delivering
a final estimate of value.
Daniel Clifford, MAI, Principal, Clifford Associates