Download Market Analysis for Simsbury Commons Shopping Center

Market Analysis for Simsbury
Commons Shopping Center
By Dags Chen, John Clapp, Tiffany Gherlone,
R Michael Goman and Vasilios Diakogeorgiou
University of Connecticut, Center for Real Estate
Version: 6/28/11
Step 5: Marketability and Market Equilibrium Analysis
Overall objective: As a commercial real estate appraisal assignment, this study performs
market analysis for a property: Simsbury Commons, an open air community shopping mall located at
498-540 Bushy Hill Road, Simsbury, CT 06070 (Subject Site, SS). This appraisal is undertaken for
investment analysis (purchase of the SS) and for evaluation of collateral for a mortgage loan.
Functional Skills:1
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1
Estimate marketability
compare supply to demand estimates
The skills in Fanning (2005, Appraisal Institute), chapter 12, should be mastered before reading this report.
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identify market gaps (unmet demand) if present
Initial Thesis: Marketability of Simsbury Commons
SC has two large vacant or soon to be vacant spaces, possibly creating a domino effect:
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Borders, about 24,000sf, not paying rent as of March 2011
o This will be difficult to divide in half because 12,000 sf is not a popular size
o 24,000 is too small for some tenants
EMS, about 7,600sf
o Ability to rent this likely depends on first finding a tenant for the Borders spot
Inability to replace Borders could cause other inline tenants to leave
o They might have co-tenancy clauses, allowing them to vacate when one of the anchors
vacates
o They might go bankrupt
o Their leases may expire allowing them to leave the ailing SC
This is a difficult market because of the anemic economy.
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Retail depends strongly on the business cycle because consumption is nearly 2/3rd of total GDP
o The business cycle – RE cycle relationship is fairly transparent in the case of retail real
estate
o If GDP changes then typically retail will quickly change in the same direction
The business cycle is in recovery in 2010-2011, but not a strong recovery
High unemployment and uncertainty among those employed reduces consumption of retail
goods and services
Excessive debt of many households, including mortgage debt, further cuts into consumption
Summary of major conclusions based on discussion below of “Step5Marketability.xls”
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The future of SC depends primarily on finding a tenant or tenants for Borders.
An electronics retailer might fill this space as discussed in Step 4, competition
o PC Richards might go head-to-head with Best Buy across the street
There could be a market gap for discount women’s clothing such as the Dress Barn
“Absorption” – i.e., the amount of space leased per unit time – will depend on resourceful
identification of possible tenants and aggressive marketing
o A general model or overall absorption rate (e.g., based on CoStar’s net absorption
number) is not likely to hold.
o Instead, SC might have the current vacancy (35,000 sf) for some time
o In a pessimistic scenario they might have 67,000sf of vacant space – nearly everything
except BB&B, the banks, Chili’s, Bob’s clothing, Hoyt Cinema, Walgreen’s and S&S.
o Or, optimistically, they will fill Borders and then EMS and then be in a strong position to
fill any inline vacancies
 In this scenario, the property has strong upside potential for an investor
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Note, however, that rents are likely to be soft in this market.
o CoStar’s estimate of $25 psf/year is likely high
o For example, an electronics store like PC Richard will bargain for low rents
Support for Conclusions on Marketability and Market Equilibrium for Simsbury Commons
The method found in the “Step5Marketability.xls” workbook is based on Fanning’s Chapter 11 & 12
analysis: but we use CoStar Data.
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The summary sheet is labeled “Residual Demand Analysis.” This is an application of Fanning
Exhibit 12.23.
The reasoning in Step5Marketability.xls follows from stepping through the spreadsheets from
“RawCoStarData” to the right. With the notes, the workbook is self-explanatory.
o Fanning’s percentage of sales, buying power and ratio methods indicate that there is
enough demand for SC to fill its vacant space.
 There is demand for nearly 100,000 additional sf in the trade area – a market
gap.
 This is an aggregate gap analysis for a large market area, 5-miles around SC. It
merely provides background for consideration of specific tenants such as PC
Richard or Dress Barn.
 The conclusion of excess demand is heavily dependent on the assumptions of
Buying Power analysis such as the 40%, 48.3% and 1.32 parameters.
o Notes on the spreadsheets indicate parameters that should be adjusted in Step 6 for
optimistic and pessimistic scenarios (aka “forecasts”).
 E.g., the 40%, 48.3% and 1.32 parameters on the Buying Power sheet are all
questionable.
 An advantage to this sort of detail is that the analyst knows where there are
weaknesses. This provides the basis for realistic scenarios on a range of
outcomes in Step 6.
o The five year forecasts in Step5Marketability.xls are based on CoStar forecasts
 But CoStar has not revealed its forecasting method – it is a black box.
 The forecasts look unrealistic – too optimistic based on the anemic recovery so
far from the current recession.
 This will be pursued in Step 6.
o Key questions for Step 6:
 What categories of retail (e.g., consumer electronics, or discount women’s
clothing) might fill the Border’s space?
 Identify specific tenants (e.g., PC Richard & Sons or Dress Barn) that might be
attracted.
 PC Richards would rely on its specialized merchandizing and advertising
to compete with Best Buy.
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The proximity of Best Buy – directly across Bushy Hill Road – might be a
plus since shoppers searching for high value electronics can comparison
shop. Similar reasoning is used for locating several automobile retailers
in a small geographical area.
 Consider plausible scenarios on $ rent psf – PC Richard might demand a steep
discount to go head-to-head with Best Buy across the street.
What would support a market gap for women’s discount clothing?
 The high-end market in the area has been taken by the Shoppes which has J. Jill
and Talbott’s. The superior location of the Shoppe’s, and the relatively high rate
of unemployment argues that SC should not challenge this market segment.
 SC has several discount clothing stores: Bob’s, Famous Footwear and Clays, so
adding to this allows customers to easily comparison shop
 The competition is Chico’s and American Eagle Outfitters, both benefitting from
their location in The Shoppes (see Step 4 for details).
 This is judged to be limited competition, given the fact that the slow
economy bolsters demand for discount items.
 Dress Barn has the type of merchandising strategy that could successfully fill this
market gap.
 It is targeted on a specific demographic, women in the 30-60 age range,
that is well represented in the trade area.2
 It provides discount clothing attractively presented.
 It does not come across as “cheap” which does not sell in a high income
area.
Relationship to Ling-Archer’s Chapter 6
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Step 5 represents another round of revisions to the market defining story.
o The first 4 steps covered all 5 questions for the story.
o Step 5 reconsiders the relationship between supply and demand.
o In the case of SC, step 5 allowed consideration of a market gap for women’s discount
clothing.
Elysian Forest was much too large – required an unrealistic capture of future demand.
o In some years, the capture was over 100% of potential demand!
Absorption for Plane Vista is based on growth in employment in Airport Island.
o See footnotes to Exhibit 6-12.
o Note that there is no quantitative connection between Exhibit 6-12 and employment.
o Therefore, these numbers might be refined by applying Fanning’s method.
2
http://www.city-data.com/city/Simsbury-Connecticut.html shows a median age of almost 40; females make up
51% of the population.
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