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Analyzing a small shopping center.

Analyzing a Small Shopping Center

The small strip or neighborhood center can be an excellent investment under the right management. However, not every center has the current or potential attributes to become a top performer, even with the best management. Before acquiring or taking over the management of a shopping center, a careful rating and analysis of the center's strengths and weaknesses is advisable.

To better assess a shopping center, I developed a performance rating sheet. All categories are rated on a one-to-five scale (with five being best). Totals are then averaged to get an overall rating from five (the ultimate center) to one (a low performance). If you carefully follow the rating guidelines, when you get to the cumulative average rating, you will have a good idea of the success of the subject center.


Location is weighted most heavily because it is the single most important factor in the success of a center.

Since centers of less than 60,000 square feet are usually daily needs centers, a "going home side" location is very important. Most customers will stop on the way home for necessities, so the easier the access to a center, the more likely they are to stop.

To determine which corner of the intersection is the perfect going home side, you first need to determine where the city's centers of employment are and where the primary neighborhoods area. In other words, you must determine in what direction people are traveling when they leave work and travel home.

As you can imagine, medians in the middle of the roadways would detract from any of the four corners except the perfect going-home side.

Pinpoint the subject center on a map, and determine on a scale of one to five the desirability of that location within the city or suburb.

A center would score lower if it is on the boundary of the city or suburb where fewer people naturally travel on their way to or from home. If it is along a heavily traveled road for the residents of the area, however, it would be natural for people to stop in to pick up an item or two at the store. In that case, it would receive a better than average rating. A location near a regional shopping mall would rate still higher.

The neighborhood around the shopping center is important in rating location. If it is a natural setting for a retail center, with other retail centers in the area and is a strong, well-maintained commercial presence, it would be a plus for the subject center.

If the area is a transitional one, with businesses such as auto body repair shops, lumberyards, bars, and rundown establishments, the center would be rated quite low on the scale. This low rating would stand even if you know the area was in transition and that most of those businesses would be torn down to make room for the new commercial businesses within the next five years. Always remember - you are rating the center for what it is now; not for its potential in the future.

Another important facet of location is the growth potential of the immediate neighborhoods around the center. If there is substantial vacant land to be developed for high density housing or if you notice model homes for subdivisions on large parcels of vacant land, it would also demand a higher rating. If there are vacant parcels of land scattered throughout the immediate neighborhood for additional single-family dwelling units, you would rate it somewhere in the middle. If, however, the in-fill areas do not exist, and there is little hope for growth in the immediate neighborhood, you should not hesitate to rate it low.

Accessibility and visibility

Accessibility can have an impact on the success of the center. It is important to always remember that shoppers do not like to drive through a parking lot that is laid out like an obstacle course. Flowers and shrubs should add appeal without interfering with access.

More and more developers today are giving into greed by adding more and more pad sites for additional front buildings, which severely hamper visibility and access. Even a well-located center will fail with zero visibility.

If a planned pad building has not been built yet, try to visualize how such a building would impact visibility; stake out the size of the building if necessary. In lease negotiations, try to restrict the type of tenant to whom the pad sites can be leased or sold.

Require certain architectural design standards so that any improvements will conform to the existing architecture. If possible, also negotiate to restrict the size of building to be built on the pad site.

The number of parking stalls are important as well as the layout of those stalls. Customers like to park directly in front of the store they are patronizing. Although you cannot accomodate customers to that extent, a center can can provide convenient close-in parking.

When analyzing a center in Florida, I was amused to see that a developer had installed a six-foot-wide planter area along the entire length of the center between the sidewalk and parking lot. Then, of course, to keep the flowers alive, he added sprinklers. Now how did he expect the shopper to get from the car to the stores?

Remember at all times that a shopping center is for the convinience of the customers. After all, customers are the prime ingredient for a shopping center's success.

Market support and competition

These elements are a little harder to define, but nonetheless important in rating a center. Tenant mix can break or make a shopping center. A good balance between retail stores, food establishments, and service businesses can help create a sure winner of a center.

In analyzing several successful centers, we have found a good balance between these categories is as follows:
Retail stores 55-70%
Food establishments 15-25%
Service businesses 15-25%

An exception to this balance would be in a theme center, a specialty center, or a service center.

In a theme center, extreme care should be taken to ensure that the same theme is carried out in future leasing. Also, if the theme revolves around an anchor tenant, make sure that tenancy is secure for a long term.

In a specialty center, there should be very little service. Most of the businesses should be retail stores and food establishments with a balance very close to 60 percent retail, 40 percent food. In a service center, your balance would be closer to 70 percent service, 20 percent food, and only 10 percent retail.

It is also essential to analyze whether the neighborhood and local area can support the type of center chosen for the location. For instance, a quality specialty center would not typically do well in a neighborhood where income is average or below average.

Certain business uses are not conducive to a shopping center and actually take away from the success of the center for various reasons: they bring questionable clientele into the center, they create parking problems, they promote no or very little cross-shopping, or they create a bad reputation for the center.

Uses that may create one of these problems may include blood banks; arcade or video game stores; lounges, bars, or taverns; health spas; more than two restaurants; adult bookstores, used clothing stores; used furniture stores; and churches or any type of meeting halls.

When looking at a center, you could surmise that it is unsuccessful if it has such tenants. There is nothing wrong with these businesses on their own, but they usually do not complement the other businesses in a small center. If you have too many detrimental uses in the center, it would be difficult to lease to the national triple A tenants, local and regional chains, or even knowledgeable mom-and-pop operators.

Other commercial businesses in the area are a plus since they will support a retail center by bringing potential customers into the area. You should assess the level of area competition, however. If there are too many small shopping centers with competitive stores, this could adversely affect the overall success of the subject center. Be very cautious in your assessment for rating purposes.

Vacancy in the competitive centers should be closely monitored. If vacancy is extremely high, it could signify an overbuilding of retail centers in that particular marketplace and could reduce initial income and cash flow.


Leasability of the shopping center can be critical. If this category rates extremely low, the project could be in trouble.

If you are looking at a relatively new retail center, and the original lease-up has not yet fully occurred, you should analyze the time that it has taken to lease up to the percent of occupancy at the time of analysis and project future leasing accordingly.

Be careful not to be too optimistic when projecting a 95 percent lease-up. If it has taken the developer an unusually long time to attain the present occupancy, you should project the same rate of lease-up during your management. This is the safest and wisest approach because if you are able to accomplish it faster, you and the owner will be pleased with the fast results and the higher income and cash flow. If it turns out, however, that you are only able to lease at the same rate as the developer, your projections will be correct.

Certain space within the center is considered more valuable than others. If the developer squeezed as much building onto a piece of land as possible without any concern for leasability, chances are you will have space that will either remain vacant for long periods of time or that will lease only for rates considerably below market.

As long as leases provide for full expense reimbursement, many managers do not feel it is necessary to evaluate triple net rents. Triple net rents must be competitive in today's marketplace to accomodate successful leasing efforts, however.

The best way to analyze the additional rents (common area maintenance, taxes, and insurance reimbursements) would be to add those rents to the base rents in order to compare it to other available space in the marketplace. When leasing a space, the tenant usually evaluates all rents when comparing your location with another. If the leases are triple net or modified gross, estimate what the additional rent will be and add it to the base rent for comparison purposes.

Physical center

The physical center can play an important part in the success of a shopping center investment. It is not critical, however, because this is one category that can be later changed through renovation or by minor superficial improvements. Grade it as it is; not by what it can be.

Avoid centers that have the "cottage look" - pretty gingerbread storefronts with small-paned windows - unless it is in a resort area. Merchants typically dislike them and consequently will not lease them. Large, clear windows can invite a customer's interest and even attract a customer into the store to shop. Narrow, heavily-tinted windows, on the other hand, prevent the customer from knowing if the store is open or what type of merchandise the store carries.

The main shopping center sign is the identification of the entire center. It is best that the main sign list only the name of the shopping center rather than all the tenants. If the customer is driving 40 to 50 miles per hour along the street in front of the center, he or she is not apt to read down the tenant list. On the other hand, mom-and-pop-type tenants prefer the tenant directory sign, and sometimes it can be a benefit when leasing the smaller stores. You will find, however, the more professional centers use just the name of the shopping center on the main sign.

Rate this category according to the overall effect the existing sign may have on the property. Rate each remaining physical aspect of the center according to appearance and condition.


Information on population and income are the easiest to rate using the rating guidelines. If the property is a daily needs center with no major anchor, you will need the demographics for the one- and three-mile radii. If there is a junior department store, supermarket, or other major anchor, you will need three- and five-mile radii since a major anchor will pull customers from a wider area due to its heavy advertising.

Demographics can be ordered from one of several different national firms that offer these services.

Economic factors

The economics of the leases and property can have a direct bearing on the future economical performance of the center. The income of the property is controlled by the leases in existence. Terms, such as rents, duration of leases, escalators, options, and expense reimbursements, must be considered in the rating of the overall property as well as in the financial projections.

The age of the property can have an effect on the future success of the center. If it is brand new, risks are greater because the center has not yet stabilized. Typically, you do not get a firm grip on the performance of a center until the first major rollover of tenants - usually at three years. Centers over 10 years may get scored lower because maintenance and competition are usually greater and physical appearance less attractive.

Rate the various lease factors using the rating guidelines in order to evaluate the economic impact the existing leases have on the center.


The potential of a center can be increased by the following four basic methods:

* Create new space. You can create new space by adding square footage to the center between buildings, at the end of a building, on a pad site out front or to the side (be careful not to ruin visibility), or at the back in the form of warehouse or storage space.

* Recapture new space. Recaptured space can add considerably to the income of the center. Be careful, however, not to lose that additional income to lost rent. Do not cancel an undersirable lease without a firm deal from a replacement tenant. Also make sure you are not trading a strong tenant for a weak one.

* Upgrade tenant mix. Tenant mix can only be upgraded for analysis rating purposes if it can be changed within the next two years. That means the majority of the leases would have to expire within two years. Then with careful planning and screening of new tenants, you could improve tenant mix, which in turn would improve the center's business.

If this is your plan, you should increase the vacancy loss during that period to compensate for lease-up, free rent, and interior construction time. You should also increase funds for tenant improvements for new tenants. These are all necessary concessions to attract the tenants you desire for your new mix.

* Increase other income. Other income can be increased by converting gross or modified gross leases to triple net leases. For instance, the leases in place on the center may all provide for tax and insurance escalators only. You can improve income when renewing those tenants by requiring full expense reimbursements (for taxes, insurance, and common area maintenance expenses).

It is exciting to look at a center you have never seen before and try to create a greater potential. Be creative, be imaginative, but be realistic. There is certainly something that can be done to bring the property to its highest potential.

In one property in my portfolio, a major national restaurant occupied one-fourth of the entire center and was at low rents without any base rent escalators in over 15 years. Business was so poor that it did not benefit any of the other businesses, and the exterior appearance of the restaurant detracted from the rest of the center. I:

* Convinced the restaurant tenant to allow me to find a replacement tenant and at that time terminate its lease.

* Found a new tenant at higher rents.

* Required the national restaurant tenant as well as the new individual tenants to guarantee the new lease.

* Negotiated 5 percent annual rent escalators.

* Required the old tenant to pay rent until the day the new tenant started paying rent and to pay the lease commission.

* Negotiated with the new tenant to pay for all tenant improvements (valued at over $250,000).

* Convinced the new tenant to totally remodel the exterior of the building by adding a balcony and continuing the shopping center facia across the entire front of the building with only a $4,000 contribution by the owner.

The net result was an upgrading of the value of the entire center. With a little creativity, it is surprising what can be accomplished.


After rating the shopping center, if the average cumulative rating is three or above, isolate those items that received a rating of two or below. Ask yourself if any of those ratings could be improved with passage of time (not more than two years) or the investment of money.

For instance, traffic quantity can be changed in time, especially if the city's traffic department has roadway improvements planned within the next few years. Likewise, the detrimental uses could be eliminated because of short-term leases. The landscaping or shopping center storefront appearance could be improved with a little money.

If this is the case, fill out another rating sheet, grading the categories that can be improved with time or money with the higher potential rating. See if the new cumulative average rating pushes it on up over a four - a high-performing center. If so, go for it; you could have a diamond in the rough. Just make sure you allocate enough funds to accomplish the improvements necessary to support the higher ratings.

If the average cumulative rating is 3.5 or less and the low ratings appeared under location, leasability, economic factors, or other categories that do not allow for improvement over the next few years, that property may have serious problems ever achieving a high performance. After all, you cannot move the center, or substantially improve tenant mix in a short period of time, or change blocked visibility. It is best to look at the weaknesses and strengths of a property and realistically decide what can and cannot be changed and how that may affect the property and its management in the long run.

Remember, while professional management should improve a center's performance, no manager can completely alter all circumstances. To be successful, management must truthfully analyze the circumstances and rate the center accordingly.

Janet S. Goodrich, CPM [R], earned the designation in 1978 while managing and leasing shopping centers in Denver at Ambrose & Company, later to become Rose Real Estate Company. In 1984, she accepted a full-time consulting position with Eiger Group, a national real estate syndicator, to set up Eiger Management Services for management and leasing of their properties throughout the United States. During that time she also was head of their acquisition analysis division and lectured monthly on the subject of analysis to securities brokers.

Ms. Goodrich is currently a real estate manager engaged in developing the fee management portfolio for Balcor Property Management, Inc.
COPYRIGHT 1989 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:property management
Author:Goodrich, Janet S.
Publication:Journal of Property Management
Date:May 1, 1989
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