Introduction
Commercial real estate, and in particular retail properties, has been on a tumultuous journey since COVID. In early 2020, retail stores shutting down created a high degree of uncertainty. Few could predict what would come next.
Now, the asset class is emerging into its next phase of growth, and there are many unknowns attached to this chapter:
- Are the drivers of commercial retail property values (area vibrancy, population growth, etc.) different since COVID?
- Is there positive migration to an area, which would increase the demand for retail services, or is there an outflow of migration?
- Which neighborhoods are experiencing a recovery of office workers? Which neighborhoods continue to lag compared to pre-COVID benchmarks? Are there new and emerging areas where a retail property is now more attractive?
- Which retail tenants are likely to renew and which are still struggling?
Historically, property owners and assessors answered these questions with a mix of gut feel, point-in-time snapshots, and migration data that lagged by a year or more.
Now, location data is stepping in to provide a new and differentiated data source to support retail commercial property owners in understanding their property values and proactively planning for tenant renewal discussions.
In this article, we’ll explore a case study for a commercial property in Dallas, TX (located at 4003-4015 Lemmon Ave) with tenants like Sport Clips, Zalat Pizza, and a nail spa, among others.
We’ll use location data to address two key questions:
- How can location data help real estate owners understand the trends in value for their retail property?
- How can location data inform and prepare property owners for tenant renewal discussions?
Taken together, these questions help property owners better assess their local markets, neighborhood trends, and property performance in near real-time while tracking progress on a regular quarterly cadence to stay up-to-date with market trends.
Property Value: Location Data for Understanding a Building’s Attractiveness
Property valuation involves navigating a complex web of local market factors. While no single data point paints a complete picture, combining multiple reliable sources into a cohesive narrative empowers real estate investors to understand the range and direction of their property’s valuation.
The desirability of an area is a pivotal factor influencing a property’s valuation. Simply put, holding all else constant, retail property values generally rise in vibrant areas with a growing population compared to regions with lower activity or a declining population.
With location data, property investors can quantify the vibrancy and desirability of an area with near real-time information. Changing market conditions requires access to data as close to real-time as possible. This isn’t possible with many other data collection methods.
While information from the US Census is reliable, it is presented with a lag and at varying levels of geography. Data for 2022 is available by MSA, but it only extends through July 2022. Zip code level information, on the other hand, is limited to 2021.
Real estate investors want to understand the value of their property — or one they’re considering purchasing — today. The current desirability of a market may differ substantially from 18-24 months ago as COVID-driven migration patterns settle. Valuations can be materially impacted by these changes.
Let’s start understanding the trends in value for our commercial property in Dallas. Specifically, we’ll focus on the desirability of our market, local area, and neighborhood. We’ll also look at the performance of tenants at our property. Well-performing tenants are likely to be a positive indicator for future buyers.
By analyzing the local market factors, we can understand whether demand will be rising for retail services — increasing the value of our property — or if an outflow of population or loss of vibrancy might be negatively impacting valuations.
Our approach involves analyzing progressively smaller geographies to develop a holistic valuation picture from the surrounding MSA to the local neighborhood. The key questions include:
- What are the market fundamentals for population growth in the Dallas MSA?
- What is the desirability of our local area?
- What is the vibrancy of our neighborhood?
- Are the tenants at our property performing well?
A holistic view of market fundamentals from the MSA down to property performance enables us to pinpoint the attractiveness of our region, surrounding area, and immediate vicinity to look for trends or patterns that will inform property valuation trends.
Dallas MSA: Healthy In-Migration
Data from the Unacast Insights platform shows that there was positive net migration into the Dallas MSA of ~40,000 people from January 2020-June 2023.
During this time period, the Dallas MSA added the most residents of any MSA in Texas and had the third highest net migration growth rate for MSAs in the state with at least 500,000 population.
Since this data is through June 2023 - a full year more recent than Census estimates - we can be reasonably confident that this macro trend of positive migration into the Dallas-Ft. Worth-Arlington MSA represents the most recent trend information available.
Takeaway: From a property valuation perspective, these positive signals indicate that our broader market is experiencing population growth, increasing demand for retail services in the region.
Local Area: Holding Flat
The property is in zip code 75219. Migration trends in and around this zip code are mixed. The zip code itself has negative net migration, but those immediately to the north are experiencing positive in-migration.
While the net migration is negative over the full time window, the recent trends are more stable.
A deeper analysis of the zip code reveals that 75% of the net migration occurred between January 2020-May 2021. The last two years have been much more stable, as seen in the net migration graph below.
Furthermore, a sizable number of people continue to move to the zip code relative to the population size. In 2023, the zip code has averaged over 500 people moving in per month, all representing potential new customers for a retail business.
Takeaway: Our conclusion from this data is that the local area trends are likely a neutral force on the property’s valuation. While the population is stabilizing compared to three years ago, it’s not growing as fast as other nearby zip codes to the north.
Neighborhood: Strong Growth
Zooming in closer to our property's location, let's examine the neighborhood where our property is situated.
We’re interested in the vibrancy of the neighborhood. Positive foot traffic trends serve as an indicator that our retail property is likely more valuable today than previously. It also presents an opportunity for our tenants to benefit from that growth.
We’ve defined the neighborhood as a “Block Group” (a US Census defined area with 600-3,000 population) that’s about 4 blocks wide by 3 blocks long. The map below illustrates the area contained in the neighborhood, along with the property address.
Location data enables us to zoom in on this specific area in detail to see the number of visitors that spend time in this block group per week or per month.
The results reveal that the area around this property is experiencing a strong post-COVID rebound. Visitation to the block group experienced a significant increase in early 2022 and peaked that summer, then stabilized in 2023 well above pre-COVID benchmarks.
During most of 2019, foot traffic levels in the neighborhood hovered around 200,000 visits per month. In 2023 through October, monthly visitation is up to ~260,000.
This data also reveals that, as of October 2023, this neighborhood (block group) ranked in the highest 7% for visitation per square mile in Dallas County, suggesting a high density of visitors to the neighborhood. This benefits retail tenants that will want high foot traffic in small areas.
Takeaway: This data suggests that the desirability of our neighborhood — and therefore our property — should be meaningfully higher than pre-COVID. More people are passing through the area and spending time near the businesses at our property. This heightened visibility and foot traffic opportunity should empower retail businesses to attract more customers into their doors.
Property Performance: Strong
Finally, let’s delve into the performance of the tenants at the property. Are they maintaining or growing their visitation levels?
Properties where the tenants perform well will naturally have a valuation advantage. We can quantify this performance through foot traffic trends. While each business will be unique, and not all performance is attributable to a property, a property with well performing tenants will be more attractive to future tenants and investors.
Let’s take one of the vendors at our property, Sport Clips, as an example. From February to July 2022, the business nearly doubled its foot traffic count and has held its foot traffic well above 2020-2021 baselines through Q2 2023.
This largely tracks with the timeline of the increase in neighborhood foot traffic in the last section.
What we see here is that the rising neighborhood foot traffic is having a positive knock-on effect for our tenants. This should be a clear sign that we have an attractive property to capture the growth in foot traffic that the neighborhood is experiencing.
Takeaway: Our property is well situated to capitalize on favorable neighborhood trends, helping sustain or increase the value of our property as foot traffic levels remain high.
Bringing it Together: Implications on Property Valuation
While location data doesn’t provide the exact value of a property, it gives insights into real-time market updates to understand a property value’s direction and momentum.
Looking back on our original questions, we can now build a story about each piece of the market and its performance, from the broader MSA down to property-level details.
Revisiting our questions from above:
- What are the market fundamentals for population growth in the Dallas MSA? Strong - there’s positive in-migration since COVID.
- What is the desirability of our local area? Neutral - There are limited recent trends in either direction.
- What is the vibrancy of our neighborhood? Very Strong - There is a large, sustained foot traffic increase.
- Are the tenants at our property performing well? Strong - Tenants are benefiting from neighborhood trends and increased foot traffic to venues.
This analysis suggests that, absent other market fundamentals like an oversupply of space driving down rents, the property’s value should be increasing relative to the last 12-24 months.
While we’ve performed a point-in-time analysis, this information is updated quarterly and presents an opportunity to set up a quarterly tracker across each of the key market indicators that we’ve analyzed (MSA, zip code, neighborhood, property) to have real-time, up-to-date visibility into the market’s trends and their implications on our property’s value.
Tenant Renewal: Location Data for Renewal Discussions
Let’s say we’re now preparing for a discussion with one of our tenants, Zalat Pizza, on a lease renewal. We’re interested in assessing their likelihood for renewal and researching area trends to prepare for the conversation.
How can location data add new insights to this process?
We’ll highlight three areas where location data supports retail tenant renewal discussions:
- Area Insights: Is the area vibrant and contributing to the tenant’s success?
- Store Performance: Is the brand performing well at this location?
- Competitive Insights: Is there risk of nearby competitive share shift?
By answering these questions, we can gain valuable insights into a tenant’s likelihood to renew as well as prepare for the renewal discussions with objective, quantified measures of why the property is situated in a valuable area for the tenant.
Area Insights
Positive area trends can have a significant impact on a landlord’s ability to retain tenants and raise rates. Are people moving to the surrounding area? Do those movers align with the tenant’s target market? Most importantly for retail tenants, is foot traffic growing in the neighborhood?
The more foot traffic passing through the neighborhood, the higher the likelihood that a tenant will see value in the location and renew. The more people that are moving to the area, the larger the market opportunity for the business.
We already looked at migration trends to the zip code in the previous section. We learned that while the 3-year trend has been moderately negative, the recent trends have been more stable.
We can go another level deeper for this analysis to see whether the people moving into the area fit the target demographic for the tenant. In other words, is the tenant likely to benefit from the people moving to the area, or is there misalignment between their target market and the in-migrants?
Our tenant for renewal, Zalat, sells “affordable luxury pizzas to the masses”. This suggests that their most likely target market is lower to upper middle class households.
Unacast data supports this conclusion and validates the target market. It shows that the top 3 customer segments at this location earn between $40,000-$55,000, indicating that the target market may be slightly below median income.
The brand generally appeals to younger households. Two of the top 3 segments being Young Professionals and Young Urban Singles.
When we look at the characteristics of the people moving to zip code 75219, we find that their median household income is $68,000 and their median age is 32. Both of these demographics comfortably fit within the range of Zalat’s target customer.
These numbers indicate that while the net migration trends are not necessarily strongly positive, there is evidence that the people that are moving in align closely with the target customer for our tenant.
This, in turn, should be a positive indicator of a tenant’s likelihood for renewal as they see more of their target market living and spending time in the zip code.
Neighborhood Insights
An area’s vibrancy — and the success of the tenant — relies not just on people living in the area, but also on people passing through and spending time in the property’s specific neighborhood.
Here, we can leverage the analysis that we walked through in the last section with a particular emphasis on the neighborhood foot traffic.
When we looked at foot traffic trends in the neighborhood, we saw that 2022 experienced a dramatic rise in foot traffic and, while currently off the peak in the last couple months, foot traffic remains well above benchmark levels from 2019-2021.
This data provides the foundation for a compelling sales pitch from the landlord to the tenant about why they should remain in the property. Higher foot traffic in the area translates into more people for the pizza chain to serve.
Takeaway: There are positive signals for the tenant’s renewal prospects based on the alignment of their target market with recent movers to the region and the sustained increase in the area’s vibrancy over the past 18 months.
Store Performance
Our most reliable indicator of store performance is foot traffic trends. Are more people visiting the store over time or is momentum stagnating?
Given the tenant’s industry, it’s likely that foot traffic trends directly correlate to revenue trends. Most people that visit a pizza shop will make a purchase; other business types with lower conversion rates may not have as direct of a correlation.
Over the last two years, this store has experienced a steady increase in foot traffic.
This should suggest that the business (1) is in a stable financial position and (2) views this location as a strong performer in their brand portfolio — both positive signs heading into a renewal conversation.
For tenants that are part of a larger brand with multiple stores, we can also use location data to show how this location performs compared to another nearby same-brand location.
If we can show outperformance against other nearby locations, this is another strong signal that the location is a good fit for the tenant and the likelihood of renewal may be higher.
We’ve selected a second Zalat location about 2 miles away from our property with the goal of comparing the foot traffic trends across the two stores.
Leveraging Unacast Insights’ Compare feature, we’re able to look at how these two brands perform head-to-head.
Our tenant — shaded in light purple below — performed similarly to the nearby location during 2021, but from 2022 onward has outperformed the other location by a notable margin.
While many reasons could exist for the outperformance, and no two locations are exactly alike, the outperformance in the last 12-18 months relative to the first 12 months suggests that there is strong reason to believe that this location is a valuable part of the Zalat portfolio of locations.
Our tenant’s location is experiencing stronger foot traffic growth than the closest next location and is maintaining those levels over a sustained period of time.
Takeaway: This location has strong foot traffic trends and is outperforming the next closest location, indicating that this is likely a valuable store for Zalat. This can be factored into lease negotiations.
Competitive Insights
Finally, let’s understand the risk of competitive share shifts in the area. How many competitors are there nearby and what has their performance been? Is the tenant at risk of declining business?
In the Unacast Insights platform, we can look at brands in the same category as Zalat, Limited-Service Restaurants, to see which industry competitors are operating nearby. These competitors are shown with the markers in the map below.
Among other pizza chain restaurants, we find limited competition in the immediate vicinity of Zalat. There’s a Pizza Hut location a couple of blocks away, but this location doesn’t appear to present a significant competitive threat to Zalat.
Further, Unacast data shows that Zalat is growing foot traffic faster than this Pizza Hut location and the two have co-existed as Zalat experienced its increased foot traffic, suggesting that Pizza Hut is not taking share from the location.
Analyzing the other surrounding limited service chains in the immediate vicinity of Zalat reveals little overlap of competitors in a similar category.
While several chain options exist, in addition to local options, it’s unlikely that any present a material threat that would suggest we should expect different results from Zalat moving forward.
Takeaway: Competitive research does not surface any direct threats to Zalat’s category or business model, reducing the risk of the tenant leaving the current location.
Bringing it Together: Implications for Tenant Renewal
As with valuation, many factors go into tenant renewal discussions, some of which are in the control of the landlord and some of which are a result of a company’s strategy, available capital, and store-level targets.
Location data equips landlords with information on the local market, neighborhood, and tenant performance to gain an edge when preparing for these conversations.
This information, in conjunction with broader commercial real estate information, gives a full picture of the market, area, and tenant when preparing for tenant renewal discussions and determining a tenant’s likelihood to renew.
Final Thoughts
In times of uncertainty, for example the commercial retail property market surrounding COVID, access to reliable, timely information supports better decision making in real time.
Information that’s 12-24 months old can lead to decisions that are out of date for the current conditions of the market.
As commercial real estate owners consider the current value of their portfolio and properties, location data can help them access key pieces of information, including:
- Identifying up-to-date migration trends in their market
- Quantifying the vibrancy of their local neighborhood and how it’s been changing
- Assessing property-level performance for tenants
Building on this information, as tenant leases come up for renewal, location data adds value by:
- Learning how the tenant has been performing over the past 12-24 months
- Benchmarking performance against nearby competitors and/or same brand locations
- Cross-analyzing local migration and foot traffic trends with a store’s target market to ensure alignment
For many real estate investors, location data provides net new information compared to data sources that have traditionally been used and helps investors develop a holistic view of their portfolio, properties, and tenants with regular updates to track performance and trends over time.
To learn more and explore the Unacast Insights platform, book a meeting with us.
