Commercial Real Estate: Retail appraisals evolve over the years

The retail sector of commercial real estate (CRE) has changed significantly since the beginning of the 21st century. The internet has disrupted the retail merchandising industry, and appraisers value property in significantly different ways from how they did their jobs 20 years ago. Appraisers have had to adapt to and embrace changes in the technology they use, which is light years ahead of what was standard in the 20th century.

Dane Anderson, MAI, CCIM, director of appraisal and consulting services at RERC, has seen many of these changes first hand in his years with RERC. He was interviewed recently about how the appraisal process has changed, especially for retail proper­ties, since the turn of the 21st century.

In the 20th century, appraisers were still using typewriters. The typewriters were soon replaced by computer-based word processors that allowed for the “cloning” of reports – appraisers could take an old report and update for differ­ences in the appraisal and subject property. This led to the linking of Word and Excel documents so that the appraisal data could be entered in Excel and automatically show up in Word. Now, sophisticated appraisal firms are using web-based systems that automate components of the appraisal process, develop the written report and link to public and/or proprietary databases for market data.

Obtaining property data often used to involve going through stacks of papers in county court­houses. Appraisers had to do extensive research or have connections to find out about transac­tions involving comparable properties. Apprais­ers often compiled lengthy reports with all kinds of information – much of it not catered spe­cifically to the needs of their clients. Now the smallest counties in the most rural areas post extensive property information online. Other information is available online and instantly, or through multiple services that can provide the information. As a result, the price of appraisals has dropped considerably.

At one time appraisers typed up their reports, had to get their photos processed, and then taped their photos into their reports. Now, with digital photography, appraisers can use services like Google Street View to see what a comparable property looked like near the date when it was sold, or prior to a renovation, to better understand the condition of a property when it sold.

“There are so many services available online; you can look up the demographics and customize a radius by distance or drive time … things like that,” said Anderson, who has more than 15 years of experience in the industry. “There’s so much more tenant data in terms of what you can do online and find out immediately about a retailer – how they’re performing, how many stores they have, how many they’re opening. There’s that immediate availability of whatever information you’re looking for – almost to the level where it’s overwhelming.”

Paradoxically, with so much more informa­tion available, it’s easier to provide clients with just the information they want and need, and it can be provided much faster. For appraisers, it has lowered the bar for starting their own businesses, but they face more pressure with demands for faster turnaround times and better use of the available data.

“We’ve evolved to where we’re providing clients what they really want instead of all that’s tradi­tionally been thrown in,” Anderson said. “Clients want pertinent information in a concise manner. They don’t want 200-page reports; they want concise analysis that’s cheaper, faster and to the point.”

Most of the technological changes started occurring early in the 2000s. At first, the major appraisal firms developed their own technol­ogy. Now, several vendors offer software for smaller appraisers. Anderson said the so-called “mom-and-pop” appraisal firms that have managed to survive so far won’t be able to compete effectively or will be at a significant disadvantage unless they take advantage of the automation tools available. The more sophisticated appraisal technology will lead to more standardized distribution of data among all the parties involved, more customized products and more appraisals that are limited in scope but more directly match the needs of the clients.

The process will likely continue to change as well. In residential real estate, there’s been a push in the last year or so to separate the inspection from the analy­sis. That change could move into CRE. A third party would do the inspection and field research and the appraiser would stay at his or her desk and perform only the valuation.

All of these changes have occurred as the retail landscape has changed dramatically. When Anderson started in the business, it was standard for large malls to be anchored by several depart­ment stores, many of which had been thriving for decades and were expected to be dependable mall anchors for years to come. There was much more certainty about cash flows because of the high probability of lease renewals. The historical business model for a mall was that the anchors paid a relatively low rent but drew high traffic that helped the smaller stores in the mall.

With so many people shopping online nowadays, many malls are repositioning themselves as “lifestyle centers” that aren’t as dependent on traditional department store chains. For appraisers, it’s harder to predict whether a mall or lifestyle center will continue to succeed. Appraisers often have to assume that more conservative lease renewal probabilities are likely; investors are also using higher required rates of return for all but the best malls.

There is greater bifurcation between the top malls and those in less-desirable locations, lead­ing to changes in appraisal assumptions. The thriving malls in “A” locations aren’t seeing much price movement, but the “B” and “C” malls in secondary or less-desirable markets can be hard to value because their future is so uncertain.

“The top malls are continuing to do well,” said Anderson, who is proficient with all aspects of property valuation, including real estate apprais­als, appraisal reviews, special research assign­ments, and providing litigation support. But for a struggling retail property, “it’s really difficult to value some of those B and C properties when the cracks are starting to show. The loss of an anchor at a B/C mall can spiral the property into dead mall territory quickly.”

Since 1931, RERC has been one of the nation’s top valuation and advisory firms. This article was adapted from one that was published in the May 2019 Situs RERC Real Estate Report, “Defensive Positioning.

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