-By Paul Rosta

As investors and owners strive to value retail centers, they can draw on a correlation between college education levels, vacancies and gross leaseable area to predict performance. This edition of CPN and sister business Nielsen Claritas’ quarterly reports provides a close-in look at counties that stand out around the country.

Over the next several years, one of the most common questions in commercial real estate will be, "What's that retail center really worth?" A first-quarter survey of distressed assets offers a clue as to how often that question will apply to underperforming assets. Through the first quarter, 1,276 retail properties were classified as distressed by Real Capital Analytics Inc. That is the most of any property sector and represents assets valued at up to $16.8 billion--second only to the $18 billion in distressed development properties tallied by Real Capital Analytics.

To some extent, a combination of experience and anecdotal observation can help owners, investors and their consultants sort out retail property values during a turbulent and confusing time. Conventional wisdom has sprung up around the relative worth of various retail categories. Of all the sector's niches, grocery-anchored centers continue to win the highest marks for value because they provide consumer necessities. "Grocers have been through the grinder in competing against Wal-Mart, and the survivors are doing a good job of it," noted Alan Billingsley, managing director & head of research for RREEF, the Deutsche Bank affiliate specializing in alternative investments.

Specific stores that are outperforming the market or combine an upscale appeal with value merchandise can also increase customer traffic for an entire center. On that list, say observers, are such popular brands as Bed Bath & Beyond, Target, Costco, Whole Foods and Best Buy. Those stores remain draws even if sales at some chains will show negligible year-over-year improvement for some time. Last month, after months of decline, Target's sales ticked up by 0.3 percent year over year, according to estimates released May 7 by the International Council of Shopping Centers. On the other side of the ledger, retail real estate veterans expect that values will lose ground at centers anchored by vacant big-box spaces and lifestyle centers during the next several years.

Most regional malls, meanwhile, are "difficult to value, even in good times," noted Kris Cooper, an Atlanta-based managing director for Jones Lang LaSalle Inc. Cooper noted that he and his colleagues are facing that challenge as they provide brokers' opinions of value for distressed assets, among them a sizable number of regional malls. The assets have also traded rarely in recent years, in part because much of the inventory is in the hands of REITs like Simon Properties Group Inc. and General Growth Properties Inc., which tend to keep their properties off the market for years, if not decades. Lenders' preference for financing smaller deals also makes valuing regional malls difficult. "If you took one to market today, it would be hard to get the value you thought would be in those properties," Billingsley asserted. "The problem with regional malls is that they tend to be $400 million to $800 million deals, and big is not good these days."

New Twists
In addition to shaping their strategies to these broader national issues, decision makers in retail real estate are, as always, using demographics to assess properties. As detailed in a companion piece to this report that was published in the May 2009 issue of CPN, marketing research and consulting firm Nielsen Claritas recently identified a relationship between college-education level and gross leasable area as a linchpin of value for retail centers that are at least 250,000 square feet in size. Specifically, Nielsen Claritas, CPN's partner in this series of quarterly reports and, like CPN, part of The Nielsen Co, found that average vacancy in areas where at least 28 percent of households include a college graduate is 5.4 percent. That figure is about 18 basis points lower than in areas where the average college education rate falls below 28 percent. Nielsen Claritas also found that vacancy was further influenced by gross leasable area per capita.

For areas with fewer than 28 percent of households that have a college graduate, an average of 9.7 square feet of gross leasable area per capita forms a major threshold. In "low college graduate" markets that have less space, the average vacancy rate is 6.2 percent. By contrast, the combination of a low level of college graduates and relatively high inventory of large centers is linked to higher vacancy. Specifically, in "low college graduate" areas where inventory climbs above 9.7 square feet per capita, average vacancy climbs to 7.9 percent. For "high college graduate" markets where the percentage of college-educated households exceeds 28 percent, 10.2 square feet of gross leasable area per person constitutes a dividing line. Where inventory is above that mark, average vacancy in large-scale centers is 6.4 percent. However, the combination of relatively low inventory and a high level of college graduates is associated with the lowest average vacancy in large centers. Among "high college graduate" markets where inventory is less than 10.2 square feet per capita, average vacancy drops to only 4 percent.

Nielsen Claritas established the correlation by analyzing data from the nation's 101 most populous core-based statistical areas. However, the largest of these federally designated units can be geographically sprawling: The CBSA centered on New York City, for example, is the nation's largest, encompassing a population of 18 million and extending into New Jersey and Pennsylvania.

In order to provide a local perspective, CPN and Nielsen Claritas first selected a group of CBSAs that have the biggest inventories of centers--at least 250,000 square feet in size. Because each CBSA is also made up of multiple counties, Nielsen Claritas drilled down to the county level as the geographic unit that best allowed for local comparisons. Among them are counties that have the nation's largest populations and are associated with major cities, such as Los Angeles, New York City, Chicago (Cook County), Houston (Harris County) and Atlanta (Fulton County). Collecting county-by-county data on gross leasable area for large centers was beyond the scope of this report. However, Nielsen Claritas' analysis indicates that college-education levels alone offer considerable insight into the ties between education, vacancy and value.

To name one example, 38 percent of Palm Beach County, Fla., households have a member with a college education. That is 11 percentage points higher than the 28 percent tipping point for big-center retail vacancy. Terry Munoz, vice president & industry practice leader for Nielsen Claritas, says that comparing county education demographics to that of the state offers another valuable perspective. A county whose proportion of college-educated households compares favorably with its home state also bodes well for large-center vacancy and, ultimately, valuation. A handful of the counties surveyed have college education levels that outstrip their states' by a wide margin. For instance, more than 54 percent of households in Montgomery County, Md., are college educated, 22 percent higher than the statewide average. Another 27.3 percent of households have a graduate degree, as well, more than twice the average for Maryland.

The contrast between education levels in two adjacent Southern California counties provides another kind of example. In Orange County, almost 32 percent of households have a college-educated adult and another 10.7 percent also have a member with a graduate degree. That compares favorably to figures for California as a whole, where 26 percent of households have a member with a bachelor's degree and another 9 percent have a member with a graduate degree. The finding would seem to bode well overall for occupancy and large-scale values in Orange County. However, in neighboring Riverside County, education demographics raise some concerns about occupancy and property values. Only 16.7 of households in Riverside come under the college-educated category, a little more than half the level for Orange County and 10 percent less than the state figure.

— Nielsen Business Media