|
';
<br />i,`
<br />vi ',
<br />,';':'
<br />:;'`.
<br />16
<br />f �J
<br />A r�ealystic approac�� -�u �m aiYalysis
<br />�f vvhether to build a sho�apix�,� �enter
<br />B�y PERaY MEYERS and S.O. KAYLEN
<br />�:Buil�ing a shoppi�g center today requires one basic too]
<br />before all else : a ve��� sharp pe�icil,
<br />The analysis of "Plannin� Shopping Center Profitss' in the
<br />�ecompanyin�; article came� abotit this wa
<br />editor of SHOPPING CENT� y� S" 0. Kaylin,
<br />which ev�ry figure w�,s deliberately assu�med to be n�the fo�
<br />side. Perr Me ers high
<br />Y Y, presiden� or F'erry Meyers Associates, Inc.,
<br />economic analy,gts, p�.red down 'thoae fi�ures to obtain � set of
<br />costa which h�ve to be met in view �f rentals that can rea-
<br />listicall� k�e obtained.
<br />The result was an ar�alysis which represents thP rock-bot-
<br />tom co�ts a developer must shoot for; any increasea in signifi-
<br />cant el�ments would require increases in minimum rentals.
<br />It mu�t be si;ress�d that e�ch shop�ing center represents a
<br />speci�l and individu�l �itua.tian by reason of geography,
<br />nature of the site, possible tenant mix �nd o'ther factors. The
<br />ar�alysiq, thexefore� should be used to evaluate the rccn e of
<br />costs and inGomes, g
<br />Costs of of�-site improveme�its, l�ga� and r,oning, account-
<br />i�g, promotion, publici�, appraisal and loan fees, interest and
<br />financing during deeelopment, rnanage�nent and i.,iscellaneous
<br />administrative cos�;s can change the figures somewha't, but,
<br />assuming land castg are in line, �hen the major costs that must
<br />be co��trolled ri�orously are those involvi��g actual construc-
<br />tion,
<br />The dif%rence between success and failure in the shopping
<br />center �ield today lies in controllin� the "vital numbers." It is
<br />hoped 'that this analysis will prove useful in setting up guide-
<br />lines to that end.
<br />v Under today's competitiv� con-
<br />d!itions a shnpping center develoger
<br />has to be firmly realistic if he is to
<br />a�chieve a profitable investment. This
<br />re�lism niust apply to all phases of
<br />a shopping center including land
<br />costs, construction, rental plans,
<br />n�inimum rentats, percentages and
<br />other lease provisions, As proved
<br />by the continuing development oi
<br />shopping centers, t�iey still can rep-
<br />resent an attractive investment—
<br />but only if all of the "vital num-
<br />bers" are contr�lled.
<br />Sfudy gives guidelines
<br />The Urban Land Institute study,
<br />"The Dollars and Cents of Shop-
<br />ping Centers," affords valuable
<br />guideposts on revenues, expenses
<br />and also the sales and rental re-
<br />sult:s of various tyges of tenants.
<br />She�pping Center Age's surveys of
<br />buil(dang costs indicate many of the
<br />main inves�tment items. Finally,
<br />ciirect experience in the planning of
<br />centers and present comgetitive cir-
<br />cumstances afford a basis for judg-
<br />ment as to a reasonable tenant
<br />"mix" in various types of centers.
<br />Our analysis will concerr� three
<br />model center. s:
<br />Center A is a junior regional
<br />(or lar�e community) de��elop-
<br />ment of 3Q0,000 square feet of
<br />gross leasable area. Key ten-
<br />ants are a 90,000 square foot
<br />department store and one or
<br />two itmior department stores
<br />of 70,000 square feet.
<br />Center B is an average r�gional
<br />center of 500,000 square feet
<br />of gross area. Two departm�ent
<br />stores with a combined gross
<br />SHOPP�NG CENTER ACiE, JUNE 1983
<br />�
<br />r
<br />area of 260,000 square feet
<br />are che key tenants.
<br />Center C is a large regional
<br />with 800,000 gross square
<br />feet, one half of which is oc-
<br />cupied by two ke}� departm�nt
<br />stores.
<br />Before proceeding with our an-
<br />alysis of these three centers let u�
<br />underline the fact that �ach shap-
<br />ping center represents a special and
<br />indi��idual situation. Average results
<br />may be useful in judging the range
<br />of costs and incomes; they cannot
<br />apply to any particular center.
<br />Keeping this in mind, we hope
<br />that the basic figures for the three
<br />model centers are reasonabl�. '1'hese
<br />basic cost figures are shown in
<br />Table 1. Our main considerations
<br />in developing these figures are:
<br />I.and costs: The land requirements
<br />of each center have been calculated
<br />without allowing any extra land for
<br />major expansi�n. Note that the land
<br />cost includes all extra expens�s for
<br />site preparation. Parking ratios vary
<br />from 9.3 spaces per 1,000 square
<br />feet of gross leasable area in Center
<br />A, to 8 spaces in Center B, and 7
<br />spaces in Center C. This lower
<br />parking ratio in the large center is
<br />quite t_ypical.
<br />C�nstn�ction costs: These include
<br />architects' and engineers' fees.
<br />$12.00 per gr��s square foot cost
<br />in Center A provides fair minimal
<br />buildings. The $15.00 cost in Cen-
<br />�ter B should cover a fair �verage
<br />construction and the $16.50 cost for
<br />Center C somewhat better than
<br />average cons�truction. It should be
<br />recognized that there is more than
<br />30% variation in building costs in
<br />SHOPPINt3 CENTER AGE, JUNE 1963
<br />various �arts of the country. An-
<br />other important variable, not con-
<br />sidered here, is the cost and oper-
<br />ating expense of an enclosed mall.
<br />A substan#iai item
<br />Fees: The expenses of planning,
<br />administrltion and leasin� repre-
<br />sent a substantial item. Our allow-
<br />ance of $1.�0 per squa:e foot in
<br />Centers A and B largely represents
<br />lea�ing expense. Tn Center C the al-
<br />lowance of $1.50 per square foot
<br />provides roorn for surveys and ad-
<br />ministration as well as leasing.
<br />1Vlortgages: We have assumed that
<br />all three centers wi11 obtain mort-
<br />gages covering 80% of the invest-
<br />m�ent. The basic interest rate is
<br />taken at 6% . The mortg�ge on Cen-
<br />ter A is to be amortized over a
<br />twenty year period at a fixed rate of
<br />8.6%, covering both int�erest and
<br />amortization. �e have assumed
<br />twenty five year mor�tgages on Cen-
<br />ters B and C with a 7.75% fixed an-
<br />nual payment.
<br />Cash return: In all three centers, it
<br />is assumed �that the developer will
<br />plan ar� eight-year payout. This
<br />would mean that, at the �nci of'
<br />eight years, �he developer will havz
<br />received his equity investment
<br />($2.75 to $4.08 per square foot in
<br />the various centers) and then would
<br />own the centers free and clear ex-
<br />cept for the remaining mortgagc.
<br />It should be noted that ou: cal-
<br />culations are entirely o.r, a cash
<br />flow basis. It is assumed that during
<br />the period the depr%ciation allow-
<br />ance wiil be high enough to cover
<br />both the amortiza�tion payment on
<br />the mortgage and also th� cash re-
<br />turn to the developer.
<br />Nec�ssae�y operating balance: Tlie
<br />opera�ting balanc� is simply the dif-
<br />ference between the gross income
<br />of the shopping center and gross
<br />operating expenses. This operatin�
<br />balance is th�e amount �that is left
<br />to pay interest, am�rtization and
<br />profit. As shown here, the operating
<br />balance necessary to cover the
<br />mortgage payments and also pro-
<br />vide a 12.5 % cash return to the
<br />developer varies from $1.29 in Cen-
<br />ter A to $1.50 in Center B, and
<br />$1.74 in Center C.
<br />Gross expenses: Gross expens�s, as
<br />shown in the Urban Land institute
<br />study, include real estate taxes,
<br />maintenance and housekeeping and
<br />other expenses (advertising, insur-
<br />ance, etc.). These expenses, particu-
<br />larly real estate taxes, show extt•eme
<br />variations in various parts ef the
<br />country. The gross expenses of $.46
<br />per gross square foot for Center A
<br />are based on the results of com-
<br />munity centers shown in the Urban
<br />Land Ins�titute study in onerations
<br />for eight ycars or less. We have
<br />�ONTINUE�
<br />�%
<br />
|