• A shopping mall is a property with “…general merchandise or fashion-oriented offerings. Typically, enclosed with inward-facing stores connected by a common walkway. Parking surrounds the outside perimeter…”  These types of assets are popular with commercial real estate investment firms and real estate investment trusts (REITs).
  • When attempting to value a shopping mall, there are a number of factors that an appraiser and/or analyst must consider including the anchor tenants, tenant mix, location, property taxes, and occupancy.
  • There are three commonly used approaches to shopping mall valuation:  the income approach, the cost approach, and the sales comparison approach.  While each is important, the income approach typically carries the most weight for a commercial property.
  • Ultimately, the importance of arriving at a reasonable valuation is important because it can impact the investment returns for both a buyer and seller.

Before purchasing any commercial real estate asset, it is only logical for an investor to want to know what the value of the property is.  They need this information so they know if the seller’s asking price is justified and/or if their offer is reasonable.  But, valuing a commercial property can be an inexact science and the result can vary based on the key assumptions made by the individual(s) performing the valuation.

In this article, the key considerations and techniques used to value a shopping mall are discussed.  By the end, readers will have a clear understanding of what a shopping mall is, what factors go into their valuation, and what techniques are used to arrive at a final value.

At First National Realty Partners, we purchase and operate grocery store anchored retail shopping centers, which have many things in common with shopping malls, including the techniques used to value them.  For more information on current investment offerings, click here.

What is a Shopping Mall?

Let’s start with a simple definition of exactly what a shopping mall is.  According to the International Council of Shopping Centers,
a mall is described as a property with “…general merchandise or fashion-oriented offerings. Typically, enclosed with inward-facing stores connected by a common walkway. Parking surrounds the outside perimeter…

Depending on their size, a shopping mall could be considered to be a “super regional mall” which has more than 800,000 SF of Gross Leasable Area or just a “regional mall” which has 400,000 – 800,000 SF of Gross Leasable Area.  In many cases, the mall has 2-5 “anchors,” which are department stores meant to attract traffic to the center.  The anchors are located on the perimeter of the structure with direct access from the parking lot and the interior of the property is filled with other, smaller tenants.

From an operational standpoint, each tenant pays some amount of rent to the shopping mall owner who uses the income to pay for the mall’s operating expenses.  Anything left over (after the loan payment) is distributed to shareholders/investors.

With this basic concept in mind, there are many factors that go into the estimate of shopping mall valuation.

Factors That Impact a Shopping Mall’s Value

Fundamentally, the main factor used to determine a shopping mall’s market value is the amount of Net Operating Income (NOI) that it produces (total rental income less total operating expenses).  But, there are several factors that go into projecting future NOI, which may or may not ultimately prove to be accurate.  

The Anchor Tenants

On a percentage basis, anchor tenants lease the most square feet in the shopping mall, which also means that they pay more rent than the other retailers.  For this reason, a greater property value is assigned to malls who are anchored by tenants with significant financial strength versus those that aren’t.  For example, Sears and J.C. Penney were popular mall anchors for many years, but have since fallen into bankruptcy.  The same goes for Nordstrom and Neiman Marcus.  As a result, their rental payment is less certain, which could result in a lower valuation.

Tenant Mix

For the interior of the property, appraisers and investors carefully evaluate the “mix” of tenants who lease space to ensure that they are financially strong, able to generate traffic, and diverse.  On the last point, the idea is that a shopper could go to the mall and purchase a wide variety of items from clothes to electronics and home decor – all in one place.  A good tenant mix makes the property more desirable versus another one that may have a large number of tenants in the same category – like fashion.

Location

For retail properties, location is everything.  Mall values are higher for those with an excellent location near major highways and in growing cities versus those that may be difficult to access or far from population centers.

Occupancy/Vacancy Rates 

Ideally, a mall owner is able to lease every single space in the property so that it is 100% full at all times.  However, this is not always the case.  A mall’s vacancy rate impacts its value because it reduces the amount of income that the property generates.  After expenses, this also lowers cash flow and Net Operating Income.

Property Taxes

Property taxes are an operating cost.  The higher they are, the less Net Operating Income that the mall produces and the lower the value of the property.

Amount of Debt

Most U.S. Malls are purchased with a commercial mortgage, which requires monthly payments.  The more debt that a property carries, the slimmer the margin for error for unexpected events.  For example, if a property has a relatively small amount of debt (50% – 70% of value), they could lose a few tenants and may not suffer much.  But, if the property is highly leveraged (85%+ of value), the loss of a few tenants may be the difference between making money and losing money.  As a result, malls with higher leverage tend to be valued at less than those with more reasonable debt levels.

With these factors – and others –  in mind there are three methodologies used to value commercial shopping malls. 

Approaches to Shopping Mall Valuation

When an appraiser is hired to value a shopping mall or when an analyst or investor attempts to do the same thing, there are three approaches that could be used:  the income approach, the cost approach, and the sales comparison approach. Each is described in more detail below.

The Income Approach

Of the three, the income approach is typically given the most consideration for a commercial property like a shopping mall.  With it, there are two steps to estimating value.

The first is to determine the amount of stabilized Net Operating Income that a property produces.  This requires an assessment of a property’s income from rents and all other sources (fees, parking rent, etc).  And, it requires an estimate of a property’s operating expenses like taxes, insurance, and maintenance.  When  expenses are subtracted from income, the resulting metric is Net Operating Income.  While this task may seem relatively simple, it is not.  It requires a significant amount of research, reviews of property financial statements, and an assessment of how they compare to similar properties in the same market.  Every line item must be justified and verified with supporting data.

Once the NOI figure is obtained, the next step is to apply a “capitalization rate” to it.  A cap rate is the ratio of a property’s income to its value, but in a valuation exercise this component is unknown.  So, the analyst or appraiser will review recent sales of comparable properties in the same market to see what cap rate they sold for.  Then, they will use this information to inform a cap rate estimate for the property they are trying to value.  NOI divided by the cap rate results in a value.  For example, if a shopping mall has NOI of $1,000,000 and a cap rate of 7%, the resulting value estimate would be $14,285,000.

The Cost Approach

The idea behind the cost approach is that a rational buyer would not pay more for a property than it would take to rebuild it from scratch.

As such, the cost approach requires detailed analysis of the cost associated with the building materials, labor, land, and finishes to arrive at an estimate of the cost to construct the building.  This estimate serves as a proxy for value.

The cost approach is most useful when trying to estimate the value of an older property or one that is so unique that it can be difficult to find comparable properties in the same market.

The Sales Comparison Approach

The sales comparison approach is exactly what it sounds like.  To estimate value, an appraiser or analyst would look at the sales prices of comparable properties – on a per square foot basis – in the same market and apply a similar value to the property that they are trying to value.

For example, if a building has 25,000 square feet of space and similar properties are selling for $100 per square foot, the sales comparison approach would estimate a value of $2,500,000.

Depending on the specifics of the valuation assignment, an analyst or appraiser may use all three approaches and take some average of the three to arrive at a final value.

Why Valuation is Important

The importance of arriving at a reasonable valuation has implications for both the buyer and the seller.

For the buyer, the price paid to acquire an asset is one of the most important factors in determining how much the investment will ultimately return.  Pay too much and it can be difficult to recover this cost through income and price appreciation.

For the seller, the reverse is true.  They want to achieve the highest price possible so they can provide a healthy return to themselves and/or their investors.

And thus is the beauty of the negotiation process.  Based on their own objectives and assumptions, both the buyer and seller will form their own opinions of value.  If they can come to an agreement, a transaction may be accomplished. 

Summary & Conclusions

A shopping mall is a property with “…general merchandise or fashion-oriented offerings. Typically, enclosed with inward-facing stores connected by a common walkway. Parking surrounds the outside perimeter…”  These types of assets are popular with commercial real estate investment firms and real estate investment trusts (REITs).

When attempting to value a shopping mall, there are a number of factors that an appraiser and/or analyst must consider including the anchor tenants, tenant mix, location, property taxes, and occupancy.

There are three commonly used approaches to shopping mall valuation:  the income approach, the cost approach, and the sales comparison approach.  While each is important, the income approach typically carries the most weight.

Ultimately, the importance of arriving at a reasonable valuation is important because it can impact the investment returns for both a buyer and seller.

Interested In Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.

If you are an Accredited Real Estate Investor  and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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