Explaining the Rental Rates of Anchor Department Stores: Evidence from the Canadian Market

Abstract:     
Property tax assessors and their valuation experts frequently argue that rentals of anchor department stores in regional/superregional shopping centers are "too low" and not representative of market rentals. Canadian shopping center data for the years 1975-1990 were analyzed to test this contention. The data included median figures for Gross Leasable Area (GLA), sales per square foot of GLA, and rental per square foot of GLA from 15 different categories of retail activities. Linear and logarithmic model specifications were tested to identify the functional form of the relationship between rental rates, size, and sales per square foot. The results demonstrate clearly and unequivocally that reported rentals for Canadian anchor department stores are entirely consistent with the lower marginal productivity (expressed in sales per square foot of GLA) accompanying their larger size. Those market rentals decrease at a decreasing rate as size in GLA increases, and increase at a decreasing rate as sales per square foot of GLA increase. A stable, consistent pattern of market behavior emerged that lends support to an income capitalization approach for valuing retail space, large or small.

JEL Classification: R22

working papers series