By Jerry Heaton, Senior Managing Consultant, Dallas
In the time since this piece first ran, the number of major brick and mortar retailers who have closed some or all of their locations has skyrocketed. Fort Worth-based Pier 1 recently announced that they are shuttering more than half of their over 900 locations across the country. They join a list that already includes Plano-based J.C. Penney, Macy's and Express.
As many retail chains continue to close their doors across the country, the impact will likely have long-term ramifications upon tax assessors’ property tax rolls for years to come. Radio Shack, a national electronics retail chain, recently announced that the company will be closing 1,100 stores nationwide. Other major retailers have made similar closing announcements, including JCPenney (33 stores), Barnes and Noble (223 stores by the year 2023), and Staples (225 stores over the next two years.) Each of these store closings occur within a community shopping center or mall that is valued by a local tax assessor. Every vacancy within a shopping center creates an immediate value reduction if the space is not filled. Even if a new tenant is found, there are significant tenant improvement expenses that must be completed by the landlord. The bottom line: the retail owner and the local tax base may suffer from this new societal trend.
The retail store closings are due to a change in our shopping patterns. According to a recent Pitney Bowes White Paper titled “Consumer Trends in Online Shopping and Shipping,” e-commerce sales have had an annual growth rate of 19.4 percent. The report went on to show that United States consumers purchasing habits are taking place online, with 52 percent of books, 51 percent of clothes, 38 percent of shoes and 41 percent of electronics being bought over the internet.
When you look at the aforementioned retail closings, it is obvious that the online purchase trend is not favorable to a specific mix of United States retailers. Retail owners that currently have major leases with books stores such as Barnes and Noble, clothing companies like JCPenney, or electronic stores such as Radio Shack, need to be on alert that their tax assessments may be impacted, especially if their tenant mix is heavy with tenants that are losing major market share to online purchases.
This trend, from a tax assessment perspective, is a notable item to review when analyzing tax assessors’ values. A tax assessor typically looks at a macro-economic view of a specific group of assets, and considers the general trend of cap rates and the latest trend of the shopping center, without consideration of the fact that the anchor (ie: Barnes and Noble) will not exist in two years. A tax assessor does not look at the specific tenant mix of a retail center or conduct a micro-economic view of that tenant mix to determine its long-term lease commitment viability.
At Paradigm Tax Group, our team of experts will review a shopping center’s performance from a current market perspective, carefully looking at every tenant to determine long-term lease commitment viability. We apply an appropriate cap rate that incorporates the long-term risk of each tenant in place, while also considering the impact of bankruptcies, past store closings, and future store closings.
The rapid growth of online shopping will have long term-impact upon retail values of select retail centers coast to coast. The retail rents have been in decline for several years and are just now coming out of recessionary levels in some areas. That being said, cap rates and vacancy rates for select retail properties are going to be challenged, and in many cases there will be assessed value declines that are directly attributed to consumer online shopping trends. The tax rolls, in total, may increase due to a more robust economy, but many shopping centers with the wrong mix of tenants may have significant value issues for years to come.
Paradigm Tax Group is well-versed in retail property valuations and has achieved significant property tax reductions for shopping centers and malls across the country. If you would like more information on how Paradigm can help your business maximize tax savings, contact Jerry Heaton at firstname.lastname@example.org or (214) 883-5026.