When 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 are small.

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 same rate.

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.

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Eric Reenstierna Associates LLC is a real estate appraisal firm taking on valuation and consultation assignments in Greater Boston, Massachusetts and New England. Eric Reenstierna, MAI, is the office's principal and is a commercial real estate appraiser.


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