A Simulation Analysis of the Relationship between Retail Sales and Shopping Center Rents

By Chun, Gregory H.; Eppli, Mark J. et al. | The Journal of Real Estate Research, May/June 2001 | Go to article overview

A Simulation Analysis of the Relationship between Retail Sales and Shopping Center Rents


Chun, Gregory H., Eppli, Mark J., Shilling, James D., The Journal of Real Estate Research


Abstract

This article examines the variation in rents per square foot among regional shopping centers in the United States in response to variation in retail sales per square foot. The analysis breaks new ground by treating base and percentage rents as endogenous functions of retail sales. The analysis further distinguishes between de facto, if not de jure, fixed and percentage leases, and between new versus existing leases. Simulation results suggest that shopping center rents can easily increase in the short-run as retail sales decrease, or they can easily decrease as retail sales increase. In addition, the results suggest that shopping center rents per square foot generally react more aggressively to an increase in retail sales per square foot over time than to a decrease in retail sales per square foot, all else equal.

Introduction

This article is concerned with the effects of variations in retail sales on the time path of shopping center rents. On the basis of a variety of evidence, including a recent article by Wheaton and Torto (1995), the case for examining the relationship between retail sales and shopping center rents is compelling.' Between 1968 and 1993, for example, retail sales in regional shopping centers in the United States (in constant dollars per square foot) fell by 20% to 40%, while rents per square foot (constant dollars) almost doubled. Since then shopping center rent and retail sales changes, for many retailers, have been such that rents and retail sales are now, as it were, just in balance. For other retailers, changes in shopping center rents have continued to outpace changes in retail sales. Still for other retailers, the changes in shopping center rent and retail sales would appear to be on the "yellow brick road" leading back to an equilibrium level (see Exhibits 1-10). As an explanation for some of these trends-particularly, the tendency for changes in shopping center rents to deviate noticeably from changes in retail sales in the short-run-this article develops a theoretical model of shopping center rents, with numerical parameters. The objectives of the article are to describe the model and to present a variety of simulations results based on it.

The particular model specified here and the simulation results obtained relate wholly to regional shopping centers in the U.S. The model has several antecedents in the literature (Benjamin, Boyle and Sirmans, 1992; Brueckner, 1993; and Miceli and Sirmans, 1995). However, it breaks new ground by (1) treating base and percentage rents as endogenous functions of retail sales; (2) distinguishing between de facto, if not de jure, fixed and percentage leases; and (3) relaxing assumptions regarding lagged effects. The model is also unique in that it is estimated completely with cross-section data. The model is used to generate a set of ex post forecasts over time. Our major findings are:

1. There is not a direct proportionality between changes in retail sales and shopping center rents, at least not in most cases and particularly not in the short-run. In the short-run, shopping center rents can easily increase as retail sales decrease, or they can easily decrease as retail sales increase.

2. The analysis here suggests that a given percentage increase in retail sales per square foot raises rents per square foot over time, all else equal, with the rent increases in the short-run being greater for shopping centers experiencing rising retail sales per square foot than for centers experiencing constant (or declining) retail sales per square foot.

3. In the long run, shopping center rents per square foot generally react more aggressively to an increase in retail sales per square foot over time than to a decrease in retail sales per square foot, all else equal.

These conclusions are, of course, subject to several limitations. First, the theory underlying the analysis deals with rents per square foot and retail sales per square foot for individual stores over time, yet the variables we measure are at a point in time (except for retail sales per square foot) and apply to aggregate data. …

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