Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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Brokers interviewed during our research stated that based on the size of the property and the rent level at the subject, a suitable alternative investment would be small net-leased properties, similar to Dollar General or Family Dollar, with a similar remaining lease term. At the property inspection, we interviewed the facilities manager, who said that this U.S. post ofce was favored as it was located in the central business district and across from the county government ofces. Te property had more parking than the surrounding post ofces, a higher percentage of leased mail boxes, additional sorting and routing capacity available, and had recently benefted from the consolidation and closing of another U.S. post ofce in the county. In this case we were able to overcome the lack of identical sales by considering appropriate alternatives as supported by our discussions with brokers as well as the tenant. Other good sources in small secondary and tertiary markets are representatives of the local economic development committees, the local Chamber of Commerce, and reporters. Te EDC and the chamber are good sources for new businesses in an area and even for information on businesses that are closing or relocating. EDCs ofen track land sales in business and industrial parks and will have knowledge of property sales and rents. In tertiary markets they are generally the most knowledgeable in the local industrial market. News reporters are an overlooked source, especially in tertiary markets. Discussions with reporters have uncovered zoning or council meeting minutes discussing planned competition, road projects, major employment changes, and other issues impacting value. Use interviews to sort out inconsistent data. While secondary markets attract out-of-market investors, tertiary markets mainly attract local buyers. Generally, the result is a less sophisticated market and buyer pool, which ofen causes pricing irregularities. For example, in late 2012, we valued a grocery-anchored center in a tertiary market that was under contract using a 9.25 percent overall cap rate based on in-place income and expenses. Te same center sold in mid-2011 on an 11.0 percent overall cap rate. Both transactions were arm's length and met the defnition of market value. Te decline in the overall cap rate resulted in a 20 percent value increase over a year-anda-half period. For comparison purposes, two national surveys had overall cap rate declines of 2.0 percent to 4.0 percent during the same time period. Factors considered in our valuation included the following. • Te population of the county (under 50,000) declined from 2000 to 2012 and was projected to decline over the next fve years. CCIM.com • County unemployment was 19.2 percent, up from 11.5 percent in 2007. • Occupancy was minimally better in 2013 than in 2011. • Te anchor had less than 10 years remaining on its original lease term at both sales. • Te center was constructed in 1999 with one small shop bay having never been leased. • Te adjacent center was vacant with the exception of seasonal use and storage. • Te subject's anchor spent money in 2009 to renovate and update the store. • Anchor store sales were average for the market and have remained fat over the past four years. • Comparable shopping center properties had overall cap rates in the 9.75 percent to 11.0 percent range. Te above factors painted an inconsistent picture of the market and the subject, which is not too uncommon in tertiary markets. For clarifcation on the market and how potential purchasers would interpret it, we relied on broker interviews. Interviews conducted included local brokers for the local market knowledge and regional brokers to gauge the depth of the buyer pool. In this case, according to both sets of brokers, the only real buyer was a local buyer. Te buyer for the subject was local, owned a similar grocery-anchored center within 20 miles of the subject, and wanted to purchase another center. Te subject was the only available center in the county, and based on the market data available, the buyer was paying an abovemarket price for the center. Knowledgeable brokers, many with the CCIM designation, are important in the valuation process. In addition to verifying comparables, they are crucial to understanding the market and trends within the market. Te relationship between brokers and appraisers can be mutually benefcial and brokers should consider appraisers as a good source of local and regional market information, comparable data, and potential leads. Valuations in small secondary and tertiary markets have become easier as more sources of data are found online, but to truly gain market perspective, the appraiser must speak with local brokers, market participants, and even tenants. As the real estate market continues to improve, the smaller markets should see the benefts of the recovery with more transactions, which in turn will make valuations in secondary and tertiary markets more reliable. John Scott Jr., MAI, MRICS, is managing director of Integra Realty Resources' Charlotte, N.C., office. Contact him at jscott@irr.com. July | August | 2013 41