CREASAT 2012

Valuation of Commercial Property

Lecture Contents
I. Types of Commercial Real Estate
II. Central Business District (CBD)
III. Floor Area Ratio (FAR)
IV. Measuring Floor Areas Office Buildings
V. Office Leasing Guidelines
VI. Classification of Commercial Property
VII. Nature of Shopping Centers
VIII. Eight Characteristics of Shopping Centers
IX. Spatial Definitions for Shopping Center Analysis
X. Criteria for the Description of Shopping Centers
XI. Traditional Types of Shopping Centers
XII. Specialty Shopping Centers
XIII. Shopping Center Investment Markets
XIV. Local Economic Analysis for Shopping Center Appraisals/Market and
Marketability Analysis
XV. Summary
XVI. Questions and Answers
I. The Commercial Real Estate Market

• Types of commercial real estate

- Office space –
 demand focuses on space for medical and dental
clinics; local service-oriented businesses, such as
accounting, real estate, and insurance; and
headquarters and branch corporate offices.
- Retail space –
 demand for retail space is a derived demand – a
demand derived from the potential volume of retail
sales.
o In turn, retail sales are dependent on the buying power of the
market area population.
Problems Faced by Most Metropolitan Centres

• Declining sales in the large conventional middle-class

oriented stores caused by a shift in new office
locations and a shift in retailing to lower-income
population
• Vacant office space found in older buildings with no
immediate reuse
• Continuing social problems and physical deterioration
of buildings endanger downtown revitalization of
commercial and office buildings
• Unfulfilled housing needs observed in the downtown
areas
II. Central Business District (CBD)

• The commercial and often geographic heart of a city

• Central district of a city, usually typified by a
concentration of retail and office buildings
• The term city centre is similar to CBD in that both serve
the same purpose for the city, and both are marked by
a higher-than-usual urban density as well as often
having the tallest buildings in a city
• Central business districts usually have very small
resident populations

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Central Business District (CBD)

• Characteristics of a typical (may not always be present)

CBD
 houses large public buildings such as libraries, churches,
stations and town halls.
 contains specialist shops and branches of major department
stores.
 contains social amenities such as cinema halls, clubs and
theatres.
 contains little housing, but often hotels.
 contains little or no industry.
 contains offices and other professional buildings.

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Central Business District (CBD)

• Characteristics of a typical (may not always be present)

CBD
 contains buildings that tend to be taller than buildings in other
parts of the city (because land prices tend to be at a premium,
making high-rise buildings economically favourable)
 has high pedestrian levels and the greatest parking restrictions.
 (often) is the geographical centre of the settlement.
 (often) is the area with the highest land value.
 is well connected by public transport, with large numbers of
passengers.
 has high traffic levels

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List of Asian CBDs

City Country Business District

Bangalore India M.G. Road, Bangalore and Bangalore CBD

Bangkok Thailand Silom, Sathon, early Sukhumvit and Lumpini
Beijing PR China Beijing CBD and Beijing Financial Street
Beirut Lebanon Beirut Central District
Chandigarh India Anna Salai
Chennai India Anna Salai
Chongqing PR China Jeofang Downtown, Jiangbei New City CBD
Dalian PR China Dalian CBD
Dhaka Bangladesh Motijheel
Dubai United Arab Emirates Deira and Bur Dubai
Guangzhou PR China Tianhe, Yuexiu
Ho Chi Minh City Vietnam District 1
Hong Kong Hong Kong Central, Wan Chai and Admiralty

Jakarta Indonesia Thamrin, Sudirman and Senayan Area/Central Jakarta

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List of Asian CBDs

City Country Business District

Jahor Bahru Malaysia Located in Jalan Wong Ah Fook, near the Johor-Singapore
Causeway
Kuala Lumpur Malaysia Kuala Lumpur City Centre and KL Sentral
Kuching Malaysia Downtown Kuching
Manila Philippines Makati, Ortigas and Fort Bonifacio
Mumbai India Nariman Point, Bandra-Kurla Complex (BKC) and Ballard Estate
New Delhi India Connaught Place
Osaka Japan Umeda, Chuo-ku, Dojima
Seoul South Korea Jung, Gangnam and Yeouido
Shanghai PR China The Bund, Lujiazui and Huangpu District
Singapore Singapore Downtown Core/Central Area
Taipei Taiwan Xinyi Planned Area
Tel Aviv Israel
Tokyo Japan Marunouchi, Nihonbashi and Nishi-Shinjuku

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Main Factors That Limit the Market for
the CBD

• Diversified property ownership

• Inadequate parking
• Change in population
• Poor land utilization
• Change in downtown functions
III. Floor Area Ratio (FAR)

• The ratio of the total floor area of buildings on a certain

location to the size of the land of that location, or the limit
imposed on such a ratio.
• The Floor Area Ratio can be used in zoning to limit the
amount of construction in a certain area.
• For example, if the relevant zoning ordinance permits
construction on a parcel, and if construction must adhere
to the floor area ratio, then the total area of all floors in all
buildings constructed on the parcel must be no more
than one-tenth the area of the parcel itself
• Allowable FAR has a major impact on the value of the
land. Higher allowable FAR yields higher land value.
 IV. Summary of Standard Method for
Measuring Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Usable Area
 This method measures the actual occupiable area of a floor or
an office suite and is of prime interest to a tenant in evaluating
the space offered by a landlord and in allocating the space
required to house personnel and furniture.
 The amount of Usable Area on a multi-tenant floor can vary
over the life of a building as corridors expand and contract and
as floors are remodeled.
 Usable Area can be converted to Rentable Area by the use of a
conversion factor.

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 Summary of Standard Method for Measuring
Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Usable Area
 The Usable Area of an office shall be computed by measuring
to the finished surface side of the office side of corridor and
other permanent walls, to the center of the partitions that
separate the office from adjoining Usable Areas, and to the
inside finished surface of the dominant portions of the
permanent outer building walls.
 No deduction shall be made for columns and projections
necessary to the building.
 The Usable Area of a floor shall be equal to the sum of all
Usable Areas on that floor.
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 Summary of Standard Method for Measuring
Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Rentable Area
 This method measures the tenant’s pro-rata portion of the
entire office floor, excluding elements of the building that
penetrate through the floor to areas below.
 The Rentable Area of a building is fixed for the life of a building
and is not affected by changes in corridor sizes and
configuration.
 This method is therefore recommended for measuring the total
income producing area of a building and for use in computing
the tenant’s pro-rata share of a building for purposes of rent
escalation.
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 Summary of Standard Method for Measuring
Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Rentable Area
 The Rentable Area of floor area shall be computed by
measuring to the inside finished surface of the dominant
portions of the permanent outer building walls, excluding any
major vertical penetrations of the floor.
 No deduction shall be made for columns and projections
necessary to the building.
 The Rentable Area of an office on the floor shall be computed
by multiplying the Usable Area of that office by the quotient of
the division of the Rentable Area of the floor by the Usable
Area of the floor resulting in the R/U Ratio.
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 Summary of Standard Method for Measuring
Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Load Factor
 The Load Factor is the percentage of space on a floor that is
not usable, expressed as a percent of Usable Area. It is also
known as the Common Area Factor or the Loss Factor.
 Formula: Load Factor (Load) = R/U Ratio - 1.

Conversion Formulas
Rentable Area/Usable Area R/U Ratio
Usable Area x R/U Ratio Rentable Area
Rentable Area/ R/U Ratio Usable Area
Usable Area x (1 + Load) Rentable Area

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 Summary of Standard Method for Measuring
Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Definitions
 Finished surface – a wall, ceiling or floor surface, including
glass, as prepared for tenant use, excluding the thickness of
any special surfacing materials such as paneling, furring strips
and carpet

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 Summary of Standard Method for Measuring
Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Definitions
 Dominant portion – that portion of the inside finished surface of
the permanent outer building which is 50% or more of the
vertical floor to ceiling dimension measured at the dominant
portions
o If there is no dominant portion, or if the dominant portion is not
vertical, the measurement of area shall be to the inside finished
surface of the permanent outer building where it intersects the
finished floor

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 Summary of Standard Method for Measuring
Floor Area in Office Buildings

• Prescribed by Building Owners and Managers

Association (BOMA)
• Definitions
 Major vertical penetrations – stairs, elevator shafts, flues, pipe
shafts, vertical ducts, and the like, and their enclosing walls
which serve more than one floor of the building, but shall not
include stairs, dumb-waiters, lifts and the like, exclusively
serving a tenant occupying offices on more than one floor

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Building Classification

• Prime Grade
• Grade A
• Grade B
• Grade C
• Building Classification Guide.pdf

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V. Office
Leasing
Guidelines
VI. Classifications of Commercial
Property

Neighborhood center
Typically has 10,000 to 12,000 square meters.
Its anchor locator may be a drugstore and a
small food store, which can be of the 7-11 type.
Its trade community is typically be about 2,000
households.
Its tenant center will provide goods and services
that people want within easy reach.
 Classifications of Commercial
Property
Community center
Typically has 35,000 to 45,000 square meters.
A food store and a drugstore will still be the anchors, but
both will be large.
Inmany ways, a community center, often called a
convenience center, is an oversized neighborhood
center.
A community center probably needs a 5,000 household
trade area.
The trade area will consist of several identifiable
neighborhoods and will be the neighborhood shopping
center for the nearby households.
 Classifications of Commercial
Property

Regional center
Has about 90,000 square meter, but most regional
centers have in excess of 150,000 square meters.
The major anchor will be one or more department stores.
The center needs 30,000 households.
A regional center will often have a food store, a
drugstore, laundry and cleaners, and the like in a
somewhat separate area on its perimeter. In other
words, the regional center may have a community or
neighborhood center adjoining it.
 Classifications of Commercial
Property

Super-regional center
Has about more than 300,000 square meters.
There will be about three major department
stores with about 30,000 square meters each.
VII. The Nature of Shopping Centers

 Shopping center – a group of commercial

establishments planned, developed, owned and
managed as a unit related in location, size and type of
shops to the trade area it serves; it provides on-site
parking in definite relationship to the types and sizes
of the stores
 Reflects a unified architectural design and site plan
 Has sign control, landscaping, and unified
management policies, usually developed through a
merchants’ association

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VIII. Eight Characteristics of Shopping Centers

• A unified architectural treatment for the building or

buildings which provide space for businesses that are
selected and managed as a unit for the benefit of all
tenants

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Eight Characteristics of Shopping Centers

• A unified site suited to the type of center demanded by

the market. The site may allow for building and parking
extension if trade area growth or other factors so indicate

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Eight Characteristics of Shopping Centers

• An easily accessible location within the trade area with

adequate entrances and exits for vehicular and
pedestrian traffic where appropriate.

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Eight Characteristics of Shopping Centers

• Sufficient on site parking to meet the demands

generated by the center’s retail commercial
establishments.
• Parking should be arranged to distribute pedestrian traffic
to maximum advantage for retail shopping and to provide
acceptable walking distances from parked cars to center
entrances and individual stores.

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Eight Characteristics of Shopping Centers

• Service facilities screened from customers for the

delivery of merchandise on site parking to meet the
demands generated by the center’s retail commercial
establishments.

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Eight Characteristics of Shopping Centers

• Site improvements, such as landscaping, lighting, and

signage to create a desirable, attractive, and safe
shopping environment

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Eight Characteristics of Shopping Centers

• Tenant grouping that provides merchandising interplay

among stores and the widest possible range and depth of
merchandise appropriate to the traded area

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Eight Characteristics of Shopping Centers

• Surroundings that are agreeable and comfortable for

shopping and create a sense of identity and place

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 IX. Spatial Definitions for Shopping Center
Analysis

• Gross Building Area (GBA) – the total area contained

within the exterior walls of the shopping center
measured as the distance between the outer surfaces
of those exterior walls

• Gross leasable area (GLA) – the total area designed for

tenants’ occupancy and exclusive use, including any
basements, mezzanines, or upper floors, expressed in
square meters and measured from the centerline of
joint partitions and from outside wall faces.
 It is the area for which tenants pay rent; it is the area that
produces income
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 Spatial Definitions for Shopping Center
Analysis

• Gross Leasable Area of Mall Shops – the total floor

space occupied by mall tenants for superregional and
regional centers. It does not include the area of the
department store tenants or any other unowned areas

• Total Occupancy Area – the total floor space of the

center. Includes all areas held by the center owner and
any areas that are independently managed or owned
but physically a part of the center.

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 Spatial Definitions for Shopping Center
Analysis

• Common Area – the total area within the shopping

center that is not designed for rental to tenants, but is
available for common use by all tenants, their invitees,
and adjacent stores.
 Parking and its appurtenances, malls, sidewalks, landscaped
areas, public toilets, truck and service facilities, and the like are
included in the common area

• Parking Area – the space devoted to car parking,

including onsite roadways, aisles, stalls, islands, and all
other features incidental to parking

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 Spatial Definitions for Shopping Center
Analysis

• Parking Area Ratio – the ratio of parking area to gross

building area

• Parking Index – the number of car parking spaces

made available per 100 square meter of GLA.
 The parking index is the standard comparison used to indicate
the relationship between the number of parking spaces and the
gross leasable area

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 X. Criteria for the Description of Shopping
Centers

• The Anchor Tenant

 Sometimes referred to as the major tenant or the key tenant in
the shopping center.
 Considered the traffic generator or the attracting force of a
shopping center
 Generates the greatest amount of customer patronage and is
usually considered strong enough to stand alone
 The type of anchor tenant depends upon the shopping center;
a supermarket in a neighborhood center or a department store
in a regional shopping center

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 Criteria for the Description of Shopping
Centers

• Type of goods sold

 Convenience or low-order goods
o Commodities that are needed and purchase
o Purchased without extensive price or style comparison
o Typically sold at locations most accessible to the consumer
o Include food, drugs, personal care products, household care
products, personal services
 Shopping or high-order goods
o Relatively expensive commodities that are purchased infrequently,
when the desire need for them arises
o Requires more effort and time
o Divided into soft goods (i.e. clothing) or hard goods (i.e. hardware
and appliances)

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 Criteria for the Description of Shopping
Centers

• Distance and travel time

 Neighborhood shopping centers attract customers from nearby

 Regional shopping centers attract customers who incur more
travel time

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 Criteria for the Description of Shopping
Centers

• Customer Base

Type of center Population Support

Required

Neighborhood center 3,000 – 40,000

Community center 40,000 – 150,000

Regional center 150,000 or more

Superregional center 300,000 or more

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XI. Traditional Types of Shopping Centers

• Neighborhood center
 Provides for the sale of convenience goods and personal
services for the day-to-day living needs of the immediate
neighborhood
 A supermarket is typically the anchor tenant
 Typical gross leasable area that may range in size from 3,000
to 10,000 square meters depending on the size of the anchor
tenant
 Smallest type of shopping center

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 Traditional Types of Shopping Centers
• Community Center
 Provides a wider range of facilities for the sale of soft lines and
hard lines
 Makes a greater variety of merchandise available, in addition to
the convenience goods and personal services
 Built around a junior department store, variety store or discount
department store as a major tenant and usually includes a
supermarket
 Does not have a full-time department store, though it may have
a strong specialty store
 In theory, typical size is 15,000 square meters of gross
leasable area, but in practice it may range in size from 10,000
to 30,000 square meters
 The intermediate type of center and is often difficult to estimate
its size and pulling power 44
 Traditional Types of Shopping Centers

• Superregional Center

 Provides an extensive array of general merchandise, apparel,

furniture, and home furnishings as well as a variety of services
and recreational facilities
 Built around at least three major department stores of not less
than 10,000 square meters each
 Typical size of a superregional center is about 80,000 square
meters of gross leasable area

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 Traditional Types of Shopping Centers

• Regional Center
 Provides general merchandise, apparel, furniture and home
furnishings in depth and variety as well as a range of services
and recreational facilities
 Its orientation is the provision of shopping goods with
substantially less emphasis on convenience goods
 Built around one or two full line department stores of not less
than 10,000 square meters each.
 Typical size is 40,000 to 75,000 square meters of gross
leasable area
 Second largest type of shopping center

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XII. Specialty Shopping Centers

• A shopping center that is characterized by the absence

of a traditional anchor tenant
 Festival Shopping Centers
o Contains stores that sell impulse specialty goods, either exclusively
or as a high percentage of their total merchandise mix
o Large portion of the GLA is devoted to restaurants and food
vendors that offer ethnic authenticity and uniqueness
o May also have a strong entertainment theme
o Often applied to any relatively small shopping centers located near
a major regional shopping mall

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Specialty Shopping Centers

 Fashion Shopping Centers

o Concentration of apparel shops, boutiques, and custom shops that
carry special, high-quality merchandise
o May include one or more high-quality fashion stores
o The tenant mix and quality are commensurate with the economic
profile of the trade area population
o Maybe anchored by one or more major specialty or better-quality
department stores or by a medium sized specialty store
supplemented with an appropriate array of fashion oriented minor
stores

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Specialty Shopping Centers

 Off-Price and Outlet Shopping Centers

o Factory outlet is owned and operated by the manufacturer and
sells good directly to the public
o Off-price retailer is like a discount store that sells brand-name
merchandise at lower prices than can be found elsewhere

 Discount Shopping Centers

o A community center anchored by a discount department store
o Smaller than a regional mall anchored by a department store
o There is a lower percentage of national or regional tenants and
therefore, a higher percentage of local tenants

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Specialty Shopping Centers

 Power Centers
o Large community centers with more than 25,000 square meters
anchored by at least three, but often four or more, anchor tenants
that occupy approximately 75% (60%-90%) of the gross leasable
area
o Generally located near regional malls in suburban markets

 Hypermarket
o Horizontally integrated community center where the typical retailers
of a community center – including the grocery, drug, apparel, and
general merchandise stores – are operated by a single owner
under one roof with centralized check out for all types of goods

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Specialty Shopping Centers

 Warehouse Club

o Not a shopping center according to accepted definitions

o 10,000 to 12,000 square meters in area and have nontraditional
locations
o Sell quality, brand-name merchandise at deeply discounted prices
o High profits result from bulk purchases of a carefully limited
selection of high turn-over merchandise and little advertising

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XIII. Shopping Center Investment Markets

• Shopping centers have traditionally been considered

very desirable investments
• Advantages include financial security (secured by
anchor tenants), rented on a net lease basis,
opportunity to renew retailing space periodically
• Successful investors in shopping centers must identify
and manage real estate investment risks
• The purchase or construction of a shopping center is
frequently financed with too much mortgage
indebtedness

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Shopping Center Investment Markets

• During periods of excess competition, a center’s

operating income may be insufficient to cover debt
obligations and still provide an acceptable equity yield
• Location is critical.
 A shopping center must receive the support of a trade area
with sufficient purchasing power and not be burdened by
excessive competition
 A center must have adequate ingress, egress, and visibility

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Local Economic Analysis for Shopping Center
Appraisals/Market and Marketability Analysis

• Key Economic Variables

 Market rent
 Vacancy rate
 The number of potential customers
 Consumer income

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XIV. Local Economic Analysis for Shopping
Center Appraisals/Market and Marketability
Analysis
• Types of Studies
 Local economic analysis
o Investigation of the major economic variables in the local economy
that affect the supply of and demand for all types of real estate
products and space
o Variables include employment, population, households and
families. Income, purchasing power
 Market analysis
o Consideration of the supply and demand for a particular type of
retail space in a predetermined geographic area
 Marketability analysis
o Marketability analysis is directly linked to market analysis, but
attention is focused on a specific site

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 Site and Building Characteristics of Shopping
Centers

• Site Characteristics
 Size of the Site
o Footprint of the building – must have enough area to contain the
shopping center structure as well as all attendant ancillary facilities
o Customer parking – major site requirement. Consideration must be
given on parking standards (parking index) and peak hour demand
for parking space
o Parking lot circulation
o Parking lot lighting and security
o Parking in relation to building entrances
o Employee parking
o Other site requirements – size of the site must be large enough to
accommodate delivery and service space

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 Site and Building Characteristics of Shopping
Centers

• Site Characteristics
 Shape of the Site
o Normal frontage to depth relationship
o Narrow frontage and great depth – lacks visibility from the major
street
o Wide frontage and shallow depth – less visibility from the
intersecting street and a parking problem
o Irregular shape – can be evaluated considering building to street
depths, location, the visibility of buildings on the site, and the
adequacy of internal circulation given odd boundary configuration

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 Site and Building Characteristics of Shopping
Centers

• Access to the Trade Area

 The relationship of the site to the street system and thus to its
retail trade is a very important site characteristic
• Relationship to the Street Pattern
 The ideal shopping center location is almost always at the
intersection of two major streets or highways
 Common wisdom suggests that corner lots should be more
valuable as shopping center sites than interior lots, but this
effect may be obscured in the market by the tenant
composition of the shopping center or the reputation and
prestige of the anchor tenant

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 Site and Building Characteristics of Shopping
Centers

• Ease of Access
 The design of the site must take into consideration adequate
curb cuts and turn lanes
 Access onto the site is also affected by the relationship
between the parking surface and the street
• Visibility
 A store must be visible to passing traffic
 Several factors that can affect visibility include street location,
position on the site, obstructions, site elevation, and
architecture
 Architectural features that reduce visibility include overhangs
and canopies, which block the view of individual storefronts;
recesses and indentions in the front of the building; and
courtyards 59
 Site and Building Characteristics of Shopping
Centers

• Signage
 Signage has two components – the shopping center sign and
tenant signs
• Landscaping
 Landscaping relates to both attractiveness and visibility
 Should be limited grassy areas and low-lying shrubbery which
adds aesthetic appeal but does not obstruct visibility
 Must be maintained. May be an additional cost to the operation
of the center

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 Site and Building Characteristics of Shopping
Centers

• Topography and Drainage

 Topography is a very important site characteristic because it
can affect the physical design of the site as well as the design
and construction of the building or buildings
 Subsurface soil characteristics and drainage are also important

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 Site and Building Characteristics of Shopping
Centers

• Utilities, Zoning, Subdivision Regulations and

Construction Codes
 Level of utility service to the different retail establishments
important within the shopping center
 Zoning, subdivision regulations and construction codes affect
the development and construction of a shopping center and
can have long-term effects on the center’s revenue potential,
maintenance and repair expenditures and other line items in
the income and expense statement

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 Site and Building Characteristics of Shopping
Centers

• Exterior Building Characteristics

 Building size
 Building configuration or shape
 Building elevation and materials
 Building entrances
• Interior Building Characteristics
 Storefronts
 Store size
 Building flexibility
 Multiple levels
 Food courts
 Interior signage

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Considerations to be taken into account when
analyzing shopping centers

• Property rights and their modifications

 Fee simple estate vs Leased fee estate
• Value definition
 Market Value
 Investment Value - specific value of an investment to a
particular investor or investors
 Business Valuation - an appraisal of a business, usually
performed to determine the present and future monetary
rewards of complete or partial ownership rights in the business
 Going-concern value - value of a proven property operation;
distinct from the value of the real estate only

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Considerations to be taken into account when
analyzing shopping centers

• Preparing Income Forecasts for Shopping Centers

 Direct capitalization vs discounted cash flow analysis
 Lease clauses, estimation of next year’s revenue and expected
growth
 Income forecasts – estimated to include base rentals,
percentage rentals and tenant reimbursements for expenses
 Leasing commissions and tenant improvement allowances
 Expenses

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Summary

I. Types of Commercial Real Estate

II. Central Business District (CBD)
III. Floor Area Ratio (FAR)
IV. Measuring Floor Areas Office Buildings
V. Office Leasing Guidelines
VI. Classification of Commercial Property
VII. Nature of Shopping Centers
VIII. Eight Characteristics of Shopping Centers
IX. Spatial Definitions for Shopping Center Analysis
X. Criteria for the Description of Shopping Centers
XI. Traditional Types of Shopping Centers
XII. Specialty Shopping Centers
XIII. Shopping Center Investment Markets
XIV. Local Economic Analysis for Shopping Center Appraisals/Market and
Marketability Analysis

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 ANY
QUESTIONS???

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THANK YOU

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