Peer Group Determines Property Rating

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No… not that group of NFL fans gobbling potato skins in your basement on Sunday… a retail property’s peer group, meaning competition in this context:

  • same property type
  • similar general size
  • same tenancy (single tenant or multiple tenant)

The above attributes comprise a property’s peer group, and peer group members are of diverse effective age, condition, quality of location, and thus overall appeal for this property subset.  So an average rating for effective age and condition in one market may be surprisingly different from the average rating for effective age and condition in another market.  Here’s a summary chart of two markets:

Market Size of
Peer Group
Actual
Average Age
# of Centers
Renovated
A 25 strip centers 21 years 11
B 25 strip centers 10 years 9

The above chart shows that market B has a younger retail strip center sector compared to market A; thus market B properties are going to rightly have a different description of what is average in terms of effective age and condition.

Next, what about peer group location quality in these two markets?

Market Peer Group High
Traffic Count
Medium
Traffic Count
Low
Traffic Count
A 25 strip centers 8 8 9
B 25 strip centers 15 5 5

The location of retail strip centers (specifically traffic count) is an important factor in the rating of retail properties. Market B’s strip centers are more recently developed than those in market A, therefore it makes sense that market B has most of its strip center component located in better (high traffic) locations, presuming local developers exercised sound site selection principles.

Property ratings are intrinsically tied to the local market for similar properties, and physically identical properties will not necessarily rank the same in different markets. This is proven in both market sales and market rents. Be careful in comparing aggregated transaction data from one (seemingly similar) market to another. Listen to the peer group, even if it’s not loud. Two markets close to each other in terms of location, with similar populations, may be totally different in economic and development dynamics.