Beyond the dark store: Exploring valuation challenges and methods for big-box retail

The valuation of big-box retail properties for taxation purposes has emerged as a contentious area in commercial real estate appraisal, epitomized by the debate surrounding the dark store theory. This theory posits that active retail stores should be appraised as if they were vacant — or “dark” — for the purposes of property tax assessment. This valuation approach has sparked significant debate among appraisers, tax assessors, property owners, and policymakers due to its implications for taxation and market valuation.

Background and evolution of big box retail

Big box retail, characterized by large, free-standing megastores located predominantly in suburban areas, has been a significant player in the retail landscape since its inception in the early 1960s. These stores were designed to serve the expansive suburban families who valued convenience and affordability, which catalyzed their expansion. However, the rise of e-commerce has significantly altered consumer expectations and shopping behaviors, prompting big box retailers to adapt by integrating online shopping with physical store experiences. Recently, there has been a notable shift towards curbside pickup and delivery services, reflecting an operational adaptation to the growing demand for convenience and immediate gratification. This evolution is starting to render traditional big box models somewhat obsolete, as the physical need for large retail spaces diminishes, challenging appraisers to reassess the highest and best use of these properties in light of changing retail dynamics.

Fundamental misunderstandings in valuation

A fundamental misunderstanding in the valuation of big-box properties lies in distinguishing between ‘value in use’ and ‘market value’. Value in use refers to the value of a property specific to a particular user, often resulting in a higher assessment due to the property’s custom features designed for the original tenant’s operations. Conversely, market value represents the price at which the property would transact in a competitive market setting, irrespective of the specific needs of any particular buyer. The dark store theory challenges this by advocating for the assessment of operational stores as if they were vacant, potentially undervaluing properties and affecting municipal tax revenues.

The dark store theory explained

The dark store theory argues that operational big-box stores should be valued as if they were empty, basing property tax assessments on the characteristics of vacant and possibly obsolete properties. This approach has led to significantly lower tax assessments for operational stores, impacting municipal budgets and redistributing tax burdens. The theory’s application often involves the sales comparison approach, where the chosen comparable properties are vacant, potentially skewing the market value assessments of fully operational stores.