Dark Store Theory - Big Box Vs Assessors & Communities

[PL1957]

Here are a couple of papers/articles on the general topic at hand prepared by the IAAO

http://www.iaao.org/media/pubs/Big-Box_Paper_Sept17.pdf
http://www.iaao.org/media/Topics/HBU/FE_Nov_Big_Box.pdf

Thoughts, comments ....

Skimmed both of them ... thought the FE article was more on point. The white paper had way too many weasel words for me ...

I thought it was interesting that neither of the FE article authors were on the big box task force that authored the other paper.

 

[Elliott]

WSJ 11/26/17: Article about selling Malls online,

"With more retailers shuttering stores across the U.S., some property owners and managers are trying to unload weak malls at a faster pace.The quickest and easiest way to do that, it turns out, is online. In July, Midway Mall in Elyria, Ohio, was sold for $4.5 million via an online auction hosted by Ten-X Commercial, an online real-estate transaction marketplace. Privately held commercial real-estate investment and management firm Namdar Realty Group purchased the single-story, 585,606-square-foot mall for $8 a square foot, according to data from Real Capital Analytics.

The mall, built in 1965, was foreclosed on last year and its mortgage was transferred to LNR Partners LLC, a special servicer that oversees workouts of troubled loans.

"The two-level, 1.05 million-square-foot mall had been valued at $144 million in 2001, before declining foot traffic and increased store closures began to take a toll. The mall was appraised at $46 million in June 2016 and then at $34.5 million in February 2017, according to real-estate research firm Trepp Inc. Most mall transactions are still done the old-fashioned way, using brokers. But brokers said some assets are better suited for online auctions, including lower-tier malls that fetch less than $20 million."

But Assessors method of valuation is correct?

 

[PL1957]

WSJ 11/26/17: Article about selling Malls online,

"With more retailers shuttering stores across the U.S., some property owners and managers are trying to unload weak malls at a faster pace.The quickest and easiest way to do that, it turns out, is online. In July, Midway Mall in Elyria, Ohio, was sold for $4.5 million via an online auction hosted by Ten-X Commercial, an online real-estate transaction marketplace. Privately held commercial real-estate investment and management firm Namdar Realty Group purchased the single-story, 585,606-square-foot mall for $8 a square foot, according to data from Real Capital Analytics.

The mall, built in 1965, was foreclosed on last year and its mortgage was transferred to LNR Partners LLC, a special servicer that oversees workouts of troubled loans.

"The two-level, 1.05 million-square-foot mall had been valued at $144 million in 2001, before declining foot traffic and increased store closures began to take a toll. The mall was appraised at $46 million in June 2016 and then at $34.5 million in February 2017, according to real-estate research firm Trepp Inc. Most mall transactions are still done the old-fashioned way, using brokers. But brokers said some assets are better suited for online auctions, including lower-tier malls that fetch less than $20 million."

But Assessors method of valuation is correct?

Apples and oranges ... dynamics/economics of malls and big box are totally different.

 

[Michael S]

I recently appraised a large class A office building in a small market for a few million dollars. The assessor had it over $10 million. One of my comps was a similar size building in a similar size market in Ohio. Same thing. Assessor had it at over $10 million but it was under contract for less than $2 million due to the massive external obsolescence. In that case the design created significant functional obsolescence as well since it was shaped like a giant basket. In either case the property owner would probably love to donate the property to the local government or anyone else if they could get a charitable deduction for the assessed value. However, the IRS would require market value and they'd be left getting 35% of a few million instead of 35% of $10-15 million.

I've seen plenty of big box retail stores get re-purposed for other uses. K-Mart has shut down several stores here in the last few years and almost every one of them has been purchased by an investor who slapped on a new façade, demised the building into 2-3 smaller spaces and leased it to other retailers who only needed 30,000 - 50,000 square feet instead of 100,000 - 150,000 square feet. In almost every case the building sold for around $50 per square foot vacant with market rent in the $4-6/SF range but by renovating and demising the space they were able to get tenants paying $10-15/SF (usually by providing about $50/SF in TI allowance). So the developer buys it for $50/SF, invests another $50-70/SF and sells it for $150/SF making a decent profit for their effort.

 

[Elliott]

Amazon sells both, oranges and apples. And in a few years will probably deliver them with a drone. : )

 

[PL1957]

Amazon sells both, oranges and apples. And in a few years will probably deliver them with a drone. : )

Markets evolve, paradigms shift ... Circuit City went away, Best Buy evolved into a showroom and pick up point for on line orders ...

 

[DREA Dean]

Markets evolve, paradigms shift ... Circuit City went away, Best Buy evolved into a showroom and pick up point for on line orders ...

I went to Best Buy last week to look at chromebooks and tablets. What a waste of time. There were four Samsung tablets on display, but not a single one of them worked. I wanted to play with one to see how it worked. After waiting and waiting, I finally saw an employee and asked why none of them worked. He told me that the store's Samsung "expert" quit last week and nobody was maintaining the display. I walked out and went to Target, where they had one working, and I bought one. Pretty bad when Target is a better electronics store than Best Buy.

But, yeah, the retail industry is in constant turmoil. Fast food restaurants and c-stores are obsolete in 15 years, and stores come and go long before the buildings are used up.

 

[Terrel L. Shields]

What a mess we create for ourselves.

Too true

K-Mart has shut down several stores here in the last few years and almost every one of them has been purchased by an investor who slapped on a new façade, demised the building into 2-3 smaller spaces and leased it to other retailers who only needed 30,000 - 50,000 square feet instead of 100,000 - 150,000 square feet.

Our NW Ark Mall dates to 1970ish. Sears, JC Penney, and Dillards have anchored the corners (its kinda 3 cornered with parking on all sides). I was in Sears for the first time in 30 years a few weeks ago. I found some pants without a person in sight, customer or help. Everything was marked down all over the store. The following day they announced they were closing. I can see why. But a couple days later, I went back and bought 3 more pair of pants. Again, only a handful of shoppers and all the checkout counters but one were closed. Even fire sale Sears itself is a loser and its embrace of the Mall scene has hurt it as well as poor management that poo-poohed Walmart until WallyWorld beat the pants off of them. In 1980's you couldn't have stirred them with a stick and the auto shop would have been full. The Dixieland Mall - another one- dates to late 1970s...has never done well and has begged for relief from the assessor time and again, usually denied. But it is a loser. I voted to lower taxes on it in 1997 when on the Board of Equalization. But they lost the appeal. It is X size, rents are X dollars per SF, and the assessor argued good management should not have more than 10% vacancy. They demonstrated that their vacancy rate was closer to 30% and had never been as low as 10% even in Xmas season with temporary leases. Only begrudgingly has the assessor lowered the value, and I predict the entire mall will be repurposed into smaller units, and developed after removing all the buildings.
In the mid-1980's the mall in Enid, OK was less than 50% occupied after a downturn in the oil economy. I bought Xmas there is a sort of weird retail dystopian nightmare where half the mall was dark and did not even have lights on. Our newest Mall is 15 years old or so, and is a series of stores with all exterior exits, and it is fairly well leased up, but I suspect the huge cost alone makes this a very low margin business.

Amazon will need warehouse space and that is going to be much cheaper assessment than retail. I honestly believe that the assessors will have to eventually be looking at retail space as little more than warehousing and "Location" is going to be secondary as a value driver, especially for large mall spaces. The combined grocery-retail store / the big box building goods will dominate the larger spaces, and the rest will be small shops, repair facilities (We have a couple of cell phone, tablet repair places in our small town now that appear to be going gang busters).

Another item I see are these food trucks. They have to be hurting a lot of lunch time cafes. There must be 10 of them in the two towns closest to me. Restaurants are another time, especially downtown in small towns, that are over-valued by assessors. The buildings are valued by condition and generally won't sell worth a hoot. But as an on-going business the "sale price" is higher than the real estate justifies. The assessor jumps on that. Meanwhile the food truck is personal property and valued fairly regardless income because the sales price of the truck and equipment can readily be documented.

 

[Gobears81]

Retail strip centers seem to be the "hot" investment right now, and some of these towns have small strip malls popping up all over the place. Some of them are dumb investments that should never have been built, but many of them are filling up quickly and certainly justifying the project costs. The transition in retail seems to be away from the malls and in some cases, big box, in lieu of these smaller in-line spaces, and I know of some tenants that have moved from an enclosed mall to these retail strips (though some larger retailers have moved from being anchor tenants or larger tenants in neighborhood shopping centers to the mall). But many of the newer, small in-line spaces seem to be skirting the prophetic demise of brick and mortar retail.

With the above said, it is telling that medical office users are now the highest bidders in many cases for what was previously considered an exclusively retail site.

 

[Carnivore]

Mall in my town has been struggling for a long time, No one goes there, but then everyone goes there once or twice a year to renew their car license tags or get tags for a car purchase because the county leased space. That was a good move on there part because all other sites had poor parking. One reason I don't go there is because by the time you park, walk around this huge place you finally find what you might be looking for, after a few times I tried this I quickly learned to go straight to Wally World and get it for a better price or order it on line for an even better price usually free shipping. I guess the day of Large shopping malls is dying out fast.

Something that has not been brought up, but County Assessors had to see the hand writing on the wall when sales tax revenue started falling dramatically in the Malls.