Retail Trends & Valuation, Part 2 of 2

Recall the Recent Trends and Pending Impact
Two emerging retail trends… 1) Multi-channeling, or the concept of selling products and services via mobile apps in/out of the store, social media influence, in-store kiosks, roving product coaches, and vending operations, and 2) Asymmetric Competition: where creativity and adaptability trump size. How will the rapid changes in retailing alter the way retail “bricks and mortar” facilities are valued? For starters (according to me), the ratio of sales floor space to back room space will be reduced, store sales per-square-foot will be realigned, and store locations may shift. Read more details in the prior post: Retail Trends & Valuation, Part 1 of 2.

Speaking of Value, is it all Real Estate?
No! And in the future, total rents may contribute less to the real estate component than before. The good news is there will likely be a clearer delineation between real estate value and business enterprise value (BEV) in rented retail property. To clarify, BEV is the part of total value attributed to the intangible assets of a continuing business enterprise. To the retailer (tenant), this is brand management, advertising, buying, storing, displaying, and delivery of product. Historically, rent for the retail real estate has been regarded as most of the base rent, with the BEV contribution being the overage portion.

Here is where it has been really muddy water for those of us charged with valuation of the real estate.  For property tax valuation purposes, many retail owners not only assign theoverage rent to BEV, but also a portion of the base rent to reflect their ongoing business enterprise in attracting/keeping tenants via extra management/marketing and tenant mix synergy.

The problem: much of that ownership effort is simply good retail development and management practice, forming a part of the real property interest known as Entrepreneurial Profit.  I guess you can’t blame them for trying, as this potentially lowers a property’s taxable component. But this will be harder to justify in the future, as retailers pressure for lower base rents to truly reflect the contribution of the real estate to their operations. The enhanced retailer BEV efforts from multi-channeling will demand appropriate recognition of their contribution to success, measured by profits above base rent.

Stated simply, national retailers will soon depend more on their non-realty assets and efforts to do business. This will lower base rents to reflect real property interest only, and should make the valuation process more straightforward.