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MEASURING THE MARKET

Developers need complex demographic data to serve the diverse needs of mixed-used property tenants

By Jennifer Hopfinger

Demographic analysis in retail site selection is growing increasingly sophisticated as shopping center developers, owners and managers — as well as retailers themselves — seek more-accurate assessments of the sales potential of their trade areas. Traditional market data still form the basis of most research, but even a basic benchmark such as household income can be sliced and diced different ways.

Meeting the different needs of homeowners, professionals and retailers in mixed-used properties necessitates more-extensive demographic analysis than many other types of developments require, says George Tullos, vice president of marketing and sales at James Doran Co., a Charleston, S.C.-based real estate development firm that focuses on high-end, mixed-use town center developments in the Southeast. But one thing is clear: James Doran is targeting high earners. “The type of person who is able to buy a $300,000 condo in a town center, and who wants to do all of their entertaining and dining and shopping there, is going to belong to a higher-income demographic,” Tullos said.

The question facing many in the industry is how best to measure that income. An October report from Merrill Lynch titled Assessing the Mall Industry argues that median household income provides a more accurate representation of a trade area than average household income. The report analyzes regional malls and public mall REITs. The analysts examine trade-area demographics by drawing a seven-mile radius around a shopping center and then measuring median household income, the number of households and the projected household growth within those rings.

The median household income represents the exact midpoint of all the separate income figures in an area. Average income, on the other hand, is calculated by dividing the sum of the area’s household incomes by the total number of households therein. But because an unusual number of affluent or poor households would sway the result up or down, average income can be misleading. It would read much higher than the median, of course, if enough wealthy households significantly push up the calculation. The nation’s average household income, for instance, was nearly 40 percent higher than the median household income in 2004, according to the U.S. Census Bureau. Merrill Lynch contends, therefore, that median household income should be the standard measure.

Many retail developers agree. “Median is the true middle of the road, because averages can be easily skewed by a few households with very high income,” said David Daleiden, director of market research at Weingarten Realty Investors, a Houston REIT. Weingarten develops and manages shopping centers in high-growth areas across the U.S. South. These properties are primarily supermarket-anchored, which means they generally cater to a broad demographic sample.

“For us, population size is absolutely critical,” Daleiden said. “Income doesn’t matter much if we don’t have the sheer numbers coming into the centers. However, income is one of the demographics that influences merchandising. We want to zero in on the right retailers for customers. You’re obviously not going to put a luxury department store in a low-income area, and you’re not going to put thrift stores in a high-income area.”

Weingarten gives more weight to median income than to average, but Daleiden says averages can be helpful. “If you see a tremendous difference between the average and median income, that might indicate you are on the border between low- and high-income areas, which can be important information to have,” he said. Coastal areas are an example: Incomes there are typically high right along the beach, but they drop off quickly just a short distance inland.

Tullos says James Doran similarly focuses on median income yet considers both median and average. “Income is a good indicator of the stability of an area, and both average and median can give you a sense of that. We look for strong community bones,” said Tullos, referring to the strength of people’s commitment to an area. “They might be slightly new, slightly emerging areas, but they’re the kind of communities that people don’t want to leave.”

This average-versus-median question is being widely discussed in the industry, says Garry Butcher, vice president of marketing and research at The Macerich Co. Macerich tracks both median and average household income, and it provides both to its retailers. “I’ve heard it said that developers tend to look at averages, and retailers prefer medians, but I think both are legitimate and important,” Butcher said. “We want to provide as much information as we can.”

In some cases, average income is all that is available, says Butcher. “When you do customized research, as we do,” he said, “customers are often asked in surveys to give an income range, in which case, the only thing you can get is an average income, because you don’t have an exact number.”

Many retailers don’t rely solely on developers and owners for income information in a trade area; they do their own market research. “We like to see our homework match up with the retailer’s homework,” Butcher said. “It’s great when the data converges and we have a common understanding. Because it does no one any good if we try to sell a retailer a site where they won’t be successful. We’re both trying to do the same thing: find the best fit.”

Whether average or median, however, income is relative to other factors. An area’s cost of living determines the amount of discretionary spending available, of course. Annual household income of $100,000 will go much further in Manhattan, Kan., than in Manhattan, N.Y.

Income data also paint a picture with broad brushstrokes. “Middle-age blue-collar workers and young urban professionals might earn similar amounts, but those two groups are going to be buying very different things,” Daleiden said.

That’s where other demographics — traditional and otherwise — add crucial detail. Population density, household size, home values, ethnicity, education and occupation are all commonly used to extrapolate sales potential.

Macerich is among a growing number of companies that also look at lifestyle characteristics, or psychographics, within a trade area. Psychographics deals with the models of cars people drive, the coffee they drink, the music they listen to, the clothing styles they prefer and the like.

“More and more retailers want demographics and psychographics,” Butcher said. “There’s enormous interest and value in both. What appeals to one consumer in a demographic group might not appeal to another. For a developer or retailer to ignore psychographics is pretty risky.”

The bottom line is, demographics is growing in importance — and complexity — in the selection and marketing of retail sites. Though such tried-and-true yardsticks as household income are essential, they do not supply all the answers. And understanding the methodology of the data makes for more-useful estimates.

“You can’t just operate by the seat of your pants anymore,” Daleiden said. “You need a fine-tuned approach to determining retail viability.”