Post #337: Retail property assessments along Maple

I’m certainly tired of hearing about what a crisis Maple Avenue retail is in.  At the risk of caricature, the argument seems to be that We Must Act Now or risk having Maple become a ghost town.

Anyone who has tried to drive down Maple Avenue on a Saturday afternoon probably wishes for a little more”ghost town” now and then.  By eye, the reality appears to be the opposite of crisis:  Maple appears to be a busy, viable, profitable shopping district.  Maybe a little too busy at times.

In this posting, I’m going to take my prior analyses of Maple Avenue retail a bit further and look at tax assessments along Maple, compared their trend and level ($/sq ft.) to assessments of similar properties outside of Vienna, but nearby.  The bottom line is consistent with all my prior work:  Tax assessments of the largest retail properties here are rising, and assessment per square foot of land is comparable to retail sites near (but not in) the Town of Vienna.

People who tell you there’s a crisis in Maple Avenue retail do not appear to have the facts on their side.


Background and summary of prior analyses.

In several places on this website, I have done my best to gather and present objective information on the state of retail on Maple.  Not anecdotes, or isolated cases, but systematic information for the whole of Maple.

First, based on my census of Maple Avenue retail (Post #201, or Post #208), the retail vacancy rate on Maple is roughly the same as it is in Falls Church (per this post).  (That may or may not have to change slightly, depending on the outcome of the Sunrise lawsuit against the Town (Post #335).  There is no large excess of empty retail space on Maple, at least not when compared to Falls Church.

Second, some buildings that appear to be long-standing vacancies are actually still being rented.   This is the case with the Leslie’s pool building, half of which remains occupied by what I termed the ghost of Sandy Spring Bank (Post #278, then Post #294).

Third, retail rents on Maple appear to be rising, with 60/sq ft/year appearing to be the new normal  (Post #319).  Anecdotally, the rumor is that this explains the loss of Joe’s Pasta.  It’s not that they didn’t have customers, it’s that they couldn’t make it when the owner of the building raised the rent.  The opening or planned opening of several new restaurants, since Joe’s closed, attests to the fact that Vienna remains able to support a viable restaurant trade.

Just to be clear, rents reflect the underlying profitability of the retail businesses.  If rents are rising, it’s probably true that Maple Avenue is a good place to locate a retail business.

So, just to be crystal clear, focus on the difference between these two scenarios, and the direction of causality:   1) Business are leaving, and rents are falling.  2)  Rents are rising, and businesses are leaving.   Situation 1) is “crisis in retail” — the loss of business opportunity is driving rents down.  (In Econ-101-speak, leftward shift of the demand curve.)  Situation 2) is “victim of your own success” — improved business opportunity is driving out marginal businesses.  (In Econ-101-speak, upward shift of the supply curve.) As long as rents are stable and rising, then what you see on Maple is far more likely to be scenario 2) than scenario 1).

Fourth, just an anecdotal observation, but consistent with Econ 101, when rents rise, it’s the unique little second-tier marginal businesses that are forced out.   Redevelopment of second-class retail space into first-class space is far more likely to result in occupancy by profitable national chains than by second-tier local businesses.  The proposed new redevelopment on Mill Street is a case in point (aside in Post #326).

 


Analysis of tax assessment levels and trends.

Why pay any attention to Fairfax County tax assessments?

First, conventionally, commercial property is worth what it will pay, in terms of net rents.  The more money the land owner can extract, from business located on that land, the more that piece of land is worth.  In that sense, speculation aside, commercial property is no different from (e.g.) bonds and stocks.  It’s worth the net present value of the stream of payments it creates.

Second, that’s exactly how Fairfax County tries to set its commercial property assessments.  It literally asks land owners to report on the payments and costs associated with their commercial buildings, then tries to estimate what the market would pay for that stream of payments.  This is explained at this Fairfax County web page.

 

For most commercial properties, fair market value is best determined by capitalizing the property's income into an estimate of value ... the ability of the property to earn income through rents, taking into account the operating expenses ... vacancy and collection losses. The resulting net operating income is then capitalized into value with an appropriate rate to achieve a fair market value estimate.

They reserve the right to use other approaches, including just plain looking at nearby sales prices.  But in the main, Fairfax County’s approach to setting assessments is directly linked to the income stream generated by the property.  And that’s why this is important.  Fairfax County tax assessments for commercial property are not some estimate of likely sales price.  Instead, they are proxies for the incomes generated by these properties, to the landlords, all evaluated on a level-playing-field basis.  They provide a common valuation model that is ultimately linked to the ability of the underlying business to pay rent on the land and buildings.

And so, the logic of this is that if the business climate for Maple Avenue retail is degenerating, then we ought to see a reduction in Fairfax County tax assessments.  That’s the time-series analysis.  Separately, if at any one point in time, Maple Avenue is a poor location for retail businesses, then the value of the land (per square foot, or per acre) should be less for Maple than other similarly-used property nearby.

To cut to the chase, if you look at those tax assessments, either over time or in a cross-section, there is no strong case that Maple Avenue retail is facing any crisis.

Methods:   These are all data drawn from Fairfax County tax assessments, which can be looked up via this website.  I wanted to stay within the Fairfax County system, which then precludes looking up values in Fairfax City or Falls Church.  And some properties have complex (condo-like) ownership that makes them hard to evaluate.  But barring those constraints, I went looking for the largest parcels on Maple Avenue, and compared them with similarly-used parcels nearby, but not on Maple.  I focused on assessments from 2016 to 2019 as representative of “what’s happened recently” to Maple Avenue retail.

Results:  Table 1 is just a little test case, a warm-up exercise so that you can see that the tax assessments appear to reflect some degree of reality.  It’s no secret that Fair Oaks Mall is struggling.  And, at least by eye, both Tyson’s Corner Mall and Tysons Galleria have lots of business.  Here’s how their tax assessments have fared over the 2016-2019 period:

Behind this table, and not shown here, are all the assessments year-by-year from 2016 to 2019.  The “Avg. Annual Increase” figure shows the average annual increase in the assessment from 2016 to 2019.  And I’ve used red to highlight that the property’s assessment did not keep up with inflation (CPI-U, seasonally adjusted, June 2016 – June 2019, average annual rate).

I call this my “warm up” because, of course, regional malls of this type are not directly relevant to Maple Avenue.  We would not have enough space/enough vehicle access to build anything like that in the heart of Vienna.

Table 2 shows what are (by eye) the largest retail properties on Maple Avenue.  The average value for all property in this table more than kept pace with inflation (yellow cell), but four properties (in red) did not.

In some sense, the Giant Food valuation may or may not be something of a cheat.  There’s no guarantee that Fairfax County ignored the most recent sales price.  But the second line — the former Magruder’s — I believe that post-dates most of the significant investment in redoing that shopping center.  I believe those valuations — as well as the difficult mid-day parking there — indicate a highly viable commercial environment at that location.  And, see below —  we see valuation increases similar to Giant at other local shopping centers.

In any case, taking the largest properties and doing a weighted average (sum-of-the-values), valuations on Maple Avenue retail properties as a whole outpaced the rate of inflation.

The four properties in red, above, are a kind of mixed bag.  Two would appear to be thriving, prosperous business locations (Whole Foods, Walgreens/Petco).  Two are plausibly struggling locations (Leslie’s Pool building, the Vienna Crossroads shopping center (site of former Oreck Vacuum).  Wait until you see the last table before forming a judgment about what is going on there.

For Table 3, I picked similar-looking properties in the area, but not located on Maple.  IMPORTANT:  Please note that these have the same sort of physical layout as the Maple Avenue properties.  I.e., in the main, these are shopping centers.  These are my best guess for properties that are comparable to what we have on Maple Avenue.

There are a handful of things to note.  First, Pan Am shopping center is right up there with the Vienna Giant Food shopping center in terms of valuation growth.  Second, the average rate of assessment increase (5.6%) is only modestly higher than what the average for Maple Avenue Vienna (5.1%).  Third, only one property on this list failed to keep pace with inflation, and that’s the Cedar Park shopping center in Vienna.

Additionally, I think I need to make this point:  There doesn’t seem to be anything wrong with shopping centers, per se, as a business model in this area.  So, if there’s a problem in the Town of Vienna, it’s probably not a consequence of having shopping centers.  I see lots of assessment growth in excess of inflation in the table above.

But this analysis only looks at growth in valuation, not the level of valuation.  I.e., if these were stocks, you’d only be looking at capital gains, not at the stock price per share itself.  So for my final table, I’m going to take some of the more prominent properties, and calculate the Fairfax County tax assessment per square foot of land.

Here are my observations.  First, property values (per square foot) in Vienna are not out of line with property values nearby.  This again strongly suggests there is no crisis or failure in Vienna retail.  Second, Vienna’s Giant Food Shopping Center is worth about as much (per square foot) as Oakton’s Giant Food Shopping Center.  Which kind of makes sense, I guess.  Third, our four under-performers in terms of “capital gains” (valuation increase over time) all have fairly substantial valuation levels as of 2019.  I.e., the most expensive property on the list, by 2019 tax valuation, is the Vienna Walgreens/Petco.

Finally, look at what a gem the Jades Shopping Center is, for valuation.  No big grocery store, no major anchor — just a bunch of little community retail businesses, with convenient front-of-store parking, on a busy street, in Vienna.  Sure, some among us may hate the way shopping centers look, but it’s hard to fault how well they work, for retail businesses on Maple Avenue.


Summary

Retail businesses come and go.  Restaurants, notoriously, are particularly short-lived on average.   Some degree of turnover of retail is to be expected.  But, at least based on what Fairfax County thinks the land is worth, it’s hard to see much difference between Maple Avenue and nearby retail.  And I think it’s hard to make the case that retail on Maple is failing.  Not just based on the anecdote of driving down Maple on a Saturday afternoon.  But based on the best objective information I could gather.

That said, there are structural changes that will affect retail rents and vacancy rates.  As I noted in my retail inventory, we have a LOT of banks, and a lot of medical offices.

Our banks largely predate the ATM era, many predate the consolidation of the banking industry.  Big bank buildings can be interesting, but they are dinosaurs, and we should expect many to be repurposed in the next few decades.

For medical offices, much of the industry is now driven by two huge trends:  The disappearance of solo- and two-person medical practice, and the drive by Medicare to move medical imaging and tests back into hospitals and out of freestanding physician-owned facilities.  Absent any other changes, those two trends could mean that a large fraction of the medical office space in Vienna is becoming obsolete.  I.e., the larger of the two vacant medical buildings at Maple and Center (where Sunrise wants to build an assisted living) was, in fact, primarily an outpatient imaging center.

So I’m not saying that there are no challenges.  Our bank-heavy, medical-heavy retail mix makes us vulnerable to these significant national trends.  But to claim that there is some immediate crisis in Vienna retail is just not borne out by the data.