The Any Municipality County assessment department enlisted Dixie’s help on a new retail development, due to her experience as Commercial Real Property Analyst. Dixie reviewed the file but no matter how many times she processed the income-based numbers, the value still did not approach the recent sale price. Her standard market research did not seem to apply to this property, at this price. Dixie knew further analysis was required.
Dixie visited the property, which appeared outwardly to be a good quality multiple tenant strip retail center. She then walked into some of the shops and found they were all relatively small in terms of square footage, yet they contained extensive branding related to interior build out. Most of the tenants were engaged in curated retail sales, described as having a narrower product focus with greater personalization and brand relevancy.
These retailers tend to focus on niche products such as kitchenware, cosmetics, fashion, artisan jewelry, etc. The tenant suites are usually small compared to the size of standard inline retail space, which in turn results in higher rents. Also, contract term lengths are generally longer compared to what is typically found. Developers of these projects seek to provide the branding-related build out, amortizing those costs in the leases over those longer multiple year terms.
Sale prices for these properties often don’t match what is usually found in the market, since branding and leased fee issues upwardly impact the rents and depress the cap rates. The dilemma, of course, is:
1) How much is real estate?
2) How much is something else, related to the business and leased fee issues?
3) Are the rent premiums assured to survive a second generation of tenancies?
If a property currently generates rent in excess of the market, that may not last. Dixie decided it was best to follow the broader market.