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Local economic analysis for shopping center appraisals.

Article Excerpt
ABSTRACT

Local economic area analysis is a study of the demand and supply factors that can affect the value of a subject property located within the boundaries of a local economic area. A local economic analysis performed for a shopping center appraisal should obtain information on the economic variables that either directly or indirectly affect the value and marketability of a subject property. This article discusses the major economic and demographic variables important in analyzing a local economic area, the nature of local economic analysis, and the sources of data for economic and demographic variables.

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Local economic area analysis is a study of the demand and supply factors that can affect the value of a subject property located within the boundaries of the local economic area. Depending on the requirements of the study and the appraiser's judgment, the local economic area (LEA) could be a large metropolitan area, a mid-sized or small metropolitan area, a small town, a county, a portion of a county, or a portion of two adjacent counties.

The appraiser's judgment is the basis for identifying the appropriate geographic area containing economic variables that affect the subject property. The local economic area for a neighborhood shopping center is smaller than that of a regional mall. The appropriate LEA for a neighborhood shopping center could be entirely contained within a county, while the LEA for a superregional mall could include multiple counties or even an entire metropolitan area.

Moreover, the local economic area analysis of a small neighborhood shopping center at the eastern fringe of a large metropolitan area would probably not be affected by economic changes at the western edge of that metropolitan area because the consumers to the west are not in the subject shopping center's geographic circle of influence. Plant openings or closings and population changes on the west side of the metropolitan area will have little or no impact on an east-side neighborhood shopping center. However, if an in-town shopping area or downtown mall were being analyzed, economic factors affecting the western fringe of the metropolitan area could have a more significant impact. Knowledge of the local community and appraisal judgment define the scope of the local economic area and the analysis appropriate to the assignment.

Local economic area analysis performed for a shopping center appraisal should obtain information on the economic variables that either directly or indirectly affect the value and marketability of the subject property. The first step is the demarcation or delineation of the local economic area for this shopping center, the subject property. In the broadest sense, the entire metropolitan area in which the subject property exists can affect it. However, in reality, only factors in a more proximate geographic area have a substantial effect on the subject property.

To perform a local economic area analysis, the appraiser needs to identify the spatial extent of the local economic area and then investigate the major economic variables in the local economic area. Employment, population, households, and income levels are the prime demand factors. Land, buildings, and space availability are the prime supply variables. Variables that result from the interaction of demand and supply, such as prices, sales, rents, and occupancy, are also important to investigate. The purpose of investigating economic variables is to determine their effect on the supply of and demand for all types of real estate products and space.

Data on market rents, vacancies, and potential customers at the western fringe of a metropolitan area may be only marginally useful in analyzing a neighborhood shopping center at the eastern fringe of the LEA. Most of the data for the western fringe of the metropolitan area will require large adjustments. Market rents, vacancies, and customer profiles may be more usable and important when analyzing a downtown mall geographically closer to the eastern fringe of the metropolitan area.

This article addresses the following three major aspects of local economic analysis for shopping center appraisals.

* Identification and discussion of the major economic and demographic variables important in analyzing a local economic area for a shopping center appraisal.

* Discussion of the nature of local economic analysis and its relation to the market in which the subject shopping center is located.

* Identification and evaluation of the sources of data for economic and demographic variables.

Major Economic and Demographic Variables

Employment

The first economic variable to be analyzed is employment. The number of available jobs, the types of jobs available, and future job prospects provide the underlying reasons why people reside in a given geographic area. Most people live where they do because they have jobs that they expect to keep in relatively close proximity to their homes. As a result, employment is a very important variable in local economic area analysis.

Employment data is reported in one of two ways. Census-based publications report employment by residence site. These sources identify whether people living in a residential...