Dixie & Selective Perception

Background: Lodging, Inc. is appealing the assessment of a downtown hotel which has no onsite parking. To accommodate guests with cars, the hotel must lease an offsite location for a parking lot and also for operation of a valet service. The parking operation is profitable.

Dixie Phair, Commercial Real Property Analyst for the Any Municipality County Assessor, is engaged in a discussion with Legal Eagle, the property owner’s representative. Here is an excerpt from the appeal transcript: Continue reading

Posted in The Adventures of Dixie Phair

The Wedding of Logistics & Retail


No need to save the date… the wedding has already happened! The marriage of warehousing/transport and retail bricks/mortar is well underway, and it’s fascinating to watch.

Retail sales floor area and stockroom space are being fluidly transformed on a trial basis to achieve the ideal proportion of display, ordering, storage, and pick-up capability. You will notice this almost monthly at your favorite retailer.

Inventory and tracking software improvements within the past 2 years are revolutionizing timely delivery from: a) manufacturer to store, and/or b) manufacturer to customer. One or two day delivery is now common.

These changes effectively allow retail store stockroom space to migrate backward through the delivery chain: from the last mile delivery van, back to the long haul eighteen wheeler, and further on back to the container ships and warehouses in between. This is truly transformative.

The marriage of warehousing/transport and retail bricks/mortar will likely reduce the overall retail footprint, but here’s what is definitely happening: customers will get more choice, better service, and increased convenience from the happy event.

Posted in Market Trends

The B Malls


Don’t worry about the A malls, or even the C malls, because their futures are pretty certain. The A malls will continue to do well in a healthy economy, and the C malls will soon close due to abandonment and/or repurposing.

But owning/managing B malls requires some of real estate’s most energetic and creative effort. The greatest challenge is in replacing (or retaining) existing anchors resulting from the demise of numerous regional and national department store and discount chains.

Mall operators previously enticed inline tenants (the smaller stores) to sign long term leases by offering them co-tenancy clauses that provided relief if the anchor tenants left the property. These clauses allowed the inlines to terminate, or remain at reduced rent, if the anchors left.

But times have changed for co-tenancy negotiations:

  • Landlords are pressuring to restrict co-tenancy clauses for renewals.
  • Landlords are also removing co-tenancy clauses for new leases.
  • New and renewing inline tenants are only signing shorter term leases.
  • Inline tenants now demand renewal options at static or even lower rent levels.
  • The definition of what constitutes an anchor store is changing; expanding to include shadow anchors (stores that are present but not attached to the mall or center), key specialty shops, and even entertainment venues.
  • Long term tenants without co-tenancy protections have been resorting to bankruptcy to extricate themselves from lease obligations.

So with excess retail store space estimated at 25% in the country, the shakeout continues and the bottom line for B malls is clear… greater leasing effort for lower rents.

Posted in Market Trends

Multifamily Non-Rented Space


An Assessment Professional recently posed a question on this topic: When is lost income from non-rented apartment units a valid charge as an expense, and when is it not? The answer is usually related to scale.

Emerging virtual model displays aside, many larger professionally managed multifamily complexes still employ a project office; some space devoted to leasing, along with model units to show prospective renters.

Non-rented areas at an apartment complex may also include administrative offices and other space, such as a clubhouse.

It is when the non-rented space includes actual apartment units (that could otherwise be leased) that the question of validity arises for valuation purposes.

If no other administrative space is available (as in a clubhouse or building devoted to leasing), use of an apartment unit or two as “model units” may be consistent with best practice management if the property contains 30 to 40 or more units.

But an allowance for lost rent on an operating statement for a smaller apartment project becomes questionable in an inverse manner. For example, in a 12 unit project, if one unit is used to facilitate managing the other 11 units, that is wasteful and atypical of market practice.

Posted in Real Life

On the Rise: Daycare Sale Prices

So what the heck is happening in the daycare industry, with sale prices sometimes far exceeding cost to replace? This question is vexing many folks who work with commercial real estate. It’s a good question to ask.

Sales of daycare centers are a bit like sales of mortuaries, bowling alleys, and other specialty properties in that they are often subject to business issues endemic to their use. For daycares, it can be franchise originated management, advertising, transportation, education software contracts (big money generators now) and other business-related components that are hard to meaningfully nail down.

Daycare properties have attracted REIT and other investor pool interest who have determined there is the potential for growth in this industry. Now everyone who owns a daycare center (or an office or clinic or even a tired retail building) wants to tap that demand.

So what you see are prices ranging wildly from $50 to $350/SF… maybe even higher.

But the cost approach still tells us a lot. Spending over $200 per SF to construct a sparsely partitioned 10,000 SF building with child-height restroom fixtures doesn’t make much sense unless you’re getting some valuable business assistance, or considerable leased fee contribution, in the deal.

Posted in Market Trends

Location, Location, In What Order?

Unless you are driven by necessity to only consider price, why do you pick one hotel over others in the same market? Location is usually the first reason on the list. You book a hotel because you don’t live there, and it makes sense to be maximally proximate to what you intend to visit.

Next, the nature of your visit often dictates what services you will require. A longer stay may suggest an extended stay facility over a full or limited service hotel, or if you intend only to use the room only for sleeping, a budget property may be the choice.

Hotel developers are good at picking convenient locations and often seek the synergy of competing properties to help establish a sense of destination.  So, there are often multiple properties of a given service type (choices within the tiers of budget, limited, extended stay) in an established hotel destination.

As an assessor/appraiser, comparing like-service properties in established destinations can be a challenge.  Often, since they are very close in age and quality, the location of these properties becomes even more paramount.

It helps to look at location in two ways, and in this order:

  1. General Location… is this the best overall location in town for hotels, or is it secondary or tertiary to other areas?
  2. Specific Location… given the general location quality (see #1), what is the proximity of the hotel to the interstate… first off or easiest to see? Or does the property have the best view? What about other characteristics… how does the individual property stack up in this submarket?

Really good valuation models will split the concept of location in the above manner for maximum accuracy of stratification, with a minimum of ranking inputs. The order really matters.

Posted in Real Life

Dixie’s Laundry List

Following is a laundry list of valuation complications presented to Dixie Phair by some Any Municipality County officials. They compiled the list after hearing about appeals in other districts, and wanted to know Dixie’s plans for tackling:

  • functional obsolescence
  • underlying land lease
  • architecture just declared historically significant
  • encumbered by a lease that is below market or above market
  • your brother-in-law owns it

As the County’s Commercial Real Property Analyst, Dixie first stated that she is very familiar with those complications and agreed that they all serve to slow down the valuation process. Dixie explained that while everyone is on their own with the brother-in-law, the other complications listed above are each too variable to accurately handle in a valuation model; they require additional time and appraisal expertise.

Dixie articulated the dilemma by repeating that four of the five laundry list items are too variable to model. But, she then also confirmed that modeling can definitely help! She realized those two seemingly contradictory statements caused confusion among the County officials, so she asked them to hang in there, and continued… Continue reading

Posted in The Adventures of Dixie Phair

When 1 + 1 < 2

The term plottage refers to the incremental value above the sum of individual values of parcels brought about by their combination. Can combining parcels ever reduce value? As always, the answer is found in the principles of Highest and Best Use

The concept of Highest and Best Use requires testing for: 1) physical possibility, 2) legal permissibility, 3) financial feasibility, and 4) maximal productivity. The first three are readily determined; for #4 a proxy for highest value is often most accurately measured by the income approach.

As an example. let’s compare two commercial developments that are identical in terms of utility, appeal, and market value. Next imagine there is an empty tract adjacent to one of the developments. Would adding the site area from that vacant adjacent parcel to the development automatically increase the market value? Not necessarily. In fact, the value of that development might actually be reduced if the extra land increases ownership expenses, for example higher taxes & maintenance costs.

For the assessment professional, this means awareness of how additional land contributes to value… if it does.

Salable excess land would contribute, but surplus area not contributive to highest and best use can be a detriment. It is possible for 1 + 1 to equal less than 2.

Posted in Real Life

A Couple of Comps and You’re…


A couple of comps and you’re golden. Seems simple enough, doesn’t it? I mean, how difficult can the commercial real estate assessment process be if all that’s required is to track down a few comps that are similar to the subject property.

Then after you find those comps, one or two may require some basic adjustments… easy right? Since the comparables are nearly identical to the subject, shouldn’t adjusting be straightforward?

Well, before you make a broad judgment regarding the process based on “all it takes is a couple of comps” consider the following case study:

Subject:

16,000 SF general office building with five tenant suites, located at the outer edge of the local commercial area. Leasing has been tough, with three tenant spaces still available two years after development. Following are the “comps” from the local market.

  • 25 year old former drugstore of 9,500 SF, in good condition with drive-up.
  • Dental office of 850 SF in former dwelling, detached garage included.
  • 80,000 SF discount shadow anchor, 40 years old with nine acres of weedy parking lot.
  • New 14,500 SF drugstore subject to a 25-year triple net lease to credit national drug chain.
  • Two sales of historic multiple story town square buildings, both 30 ft wide, one @ 9,000 SF and the other @ 11,000 SF.
  • Modular used car sales building of 1,100 SF on a very small parcel (majority of car sales lot was sold separately).
  • 12,000 SF, one story funeral home building, 25 years old, with vehicle barn at rear.
  • 40 year old former fast food, 4,500 SF with three drive cuts, signage still present.
  • Food anchored, 15 year old 82,000 SF shopping center with undeveloped outlot.
  • 100 year old church building, street parking only, last repurpose was a restaurant.

This post illustrates the reality and complexity of the commercial assessment process. Finding properties that are truly comparable can be extremely challenging. Comps are not everywhere, even in dynamic markets. Without solid support, adjustments to comparables are not reliable. In addition to physical characteristics (building size & condition, acreage) many other factors need to be considered, including but not limited to conditions of the sale, timing, location (specific/general), and more.

That’s how difficult it really is.

Posted in Case Studies

Please Take This Personally


As a commercial real estate broker in the year 2000, I was involved in the sale of a 400,000+ SF midwestern warehouse. At that time, and in that local market, good quality warehouses of over 20’ clear height were selling above $20 per SF, but this one sold for less than half that.

About 40% of the building was 2 story, so there was considerable functional obsolescence. Even though both stories were in excess of 18’ clear and the property was in good condition, the idea of multiple floors in a warehouse harkened back to decades-old building practices in urban environments.

But the advent of online retailing is a great example of how things can change. In April 2017 a well known international industrial developer/owner broke ground on a 3 story 500,000+ SF warehouse. It is located in a rapidly growing western U.S. area, where there’s a lot less flat land compared to the midwest; nonetheless multiple storied industrial buildings are still news!

While it is certainly a warehouse, the new property is called a fulfillment center and had two requirements for development: a) proximity to a large population center for the “last mile” delivery of online sales, and b) material handling systems through use of robotics. Given the huge & rapid technological improvements in robotics, this is sure to be a trend.

To determine total valuation for these properties, the challenge for assessors will be to separate the real property from the personal property. A future appeal tactic will undoubtedly be to attribute much of the total value to personal property for faster depreciation.

Posted in Market Trends