Building Size Adjustments For Multi-tenant Investment Properties - I Hate Them!

[Scott Cole]

The reliance upon size adjustments for investment properties drives me crazy. Does anyone really think that a shopping center investor considers the overall size of a stabilized property in their decision making? Nooooo!

 

[NachoPerito]

You are talking about the "size of investment" adjustment right?

There are a lot situations where there should be an adjustment. I don't normally adjust between $1M and $3M, but I will make an adjustment for smaller investments $250k to $500k when comparing to a $2M investment (when I have trouble finding comps). smaller investments tend to sell for lower cap rates depending on the property. In my market that starts happen when you get under $1M. Also if we are talking about a $30M property versus a $5M property sometimes the cap rate will be LOWER for the more expensive sale because the competition includes REITs and pension funds at that price.

 

[leasedfee]

The reliance upon size adjustments for investment properties drives me crazy. Does anyone really think that a shopping center investor considers the overall size of a stabilized property in their decision making? Nooooo!

If the market doesn't warrant it, then don't make an adjustment. Non-problem solved.

(I mostly deal with small, local Class C and D properties, so size is an adjustment factor. If you derive a Marshall & Swift cost curve, anything above about 60,000 square feet provides no marginal savings on cost per square foot. )

 

[Scott Cole]

You are talking about the "size of investment" adjustment right?

There are a lot situations where there should be an adjustment. I don't normally adjust between $1M and $3M, but I will make an adjustment for smaller investments $250k to $500k when comparing to a $2M investment (when I have trouble finding comps). smaller investments tend to sell for lower cap rates depending on the property. In my market that starts happen when you get under $1M. Also if we are talking about a $30M property versus a $5M property sometimes the cap rate will be LOWER for the more expensive sale because the competition includes REITs and pension funds at that price.

No, I am talking about making a size adjustment on an adjustment grid because the subject has 43,000 square feet, and the sale has 60,000 square feet. Each of the sales were adjusted for building size, including one that was 49,000 square feet. In the report I am bitching about today, the appraiser didn't bother to obtain any sort of income data for the comparable sales.

 

[hastalavista]

If the market doesn't warrant it, then don't make an adjustment. Non-problem solved.

(I mostly deal with small, local Class C and D properties, so size is an adjustment factor. If you derive a Marshall & Swift cost curve, anything above about 60,000 square feet provides no marginal savings on cost per square foot. )

Tim-

Would it be reasonable to expect to see some differences in operating expenses with the larger the complex, the lower ($/sf) the expense?
Although I would also expect to see such differences to be rather trivial unless the size is rather significant (say, 100ksf vs. 60ksf).

However, if there is a non-trivial difference that does warrant consideration in the SCA, should that be labeled as a building-size adjustment, or is it better identified as an adjustment with a different label?

 

[Michael S]

For investment properties my general rule of thumb is a comparable property either needs to be twice as large or half the size before I'll think about a size adjustment. It's pretty rare I'll ever make a size adjustment for investment properties.

 

[leasedfee]

Denis,
It might be reasonable, but CAM charges can be quite varied and don't always seem to fall tightening into place. My experience is that CAMs are more of a grouping of, say $8 to $12/sf as so many things get put into them (or not disclosed in a brochure) like Special Improvement District taxes and high quality landscaping, capital recapture fees, or not. Saw one lease that CAM charged for long-term capital repairs; tenants were paying it, though it wasn't the market's custom. That's why we capitalize NOI and not EGI.

In the sales comparison approach, for myself, I try to stick to observable characteristics like

• demographics;
• architectural quality, which does seem to have a difference in a strip retail store;
• condition condition and condition; tenant quality; anchors; etc. No doubt it gets messy,
• location per se usually seems to be relatively similar among the comparable, i.e., busy arterials with stop lights, if you're choosing the right comps. And location then seems to be driven by HH demographics surrounding and frequenting the center. But that's just me.
• size then is a pretty minor characteristic

If you go to my friend the Cost Approach, and reverse engineer the numbers you find that a 5% adjustment in any one element of comparison is categorically large when you have a building that constitutes $250 to construct on land that cost $30/sf+.

 

[hastalavista]

If you go to my friend the Cost Approach, and reverse engineer the numbers you find that a 5% adjustment in any one element of comparison is categorically large when you have a building that constitutes $250 to construct on land that cost $30/sf+.

(my bold)

Good stuff- Thanks, Tim!

(Yes, my friend too! Many times unappreciated and dismissed, but always seems to be there when I need him!).

 

[DREA Dean]

No, I am talking about making a size adjustment on an adjustment grid because the subject has 43,000 square feet, and the sale has 60,000 square feet. Each of the sales were adjusted for building size, including one that was 49,000 square feet. In the report I am bitching about today, the appraiser didn't bother to obtain any sort of income data for the comparable sales.

As mentioned above, I generally don't even think about making a size adjustment unless the comparable sales is less than half or more than double (SF, dwelling units, whatever) my subject property. Even then, I may not make an adjustment, based on the property type. Unless the appraiser includes compelling support, adjusting a 49k or 60k SF building when the subject is 43k seems nutty.

As for "didn't bother to obtain any sort of income data for the comparable sales", there is a possibility you are being too harsh, or making an erroneous assumption. I work in some markets where it is pretty much impossible to obtain income data for sales. If I haven't appraised the sale property recently, or can't get another appraiser to give me some figures, it's just not happening. Buyers, sellers and agents (in some markets) are often very tight-lipped about leases, income and cap rates. There is one county near me where I quote very high fees for income properties because I know I will have extreme difficulty obtaining comparable rents, because none of the property owners or agents will disclose anything. About half of the commercial agents won't even return calls to appraisers, let alone provide data. Most of the time, I can't even get the owner (of an office or retail property, for example) to give me rent comps from other similar properties he owns.

 

[Ken B]

Size adjustments can be related to both economies of scale and supply and demand. While, on a per SF basis, it can cost less to build a larger property compared to a smaller property, there is also a greater number of buyers with effective demand for smaller properties.

So, in addition to higher construction costs for smaller properties compared to otherwise similar larger properties, there is more demand for the smaller properties. Which is a factor that can't be extracted from MVS.