Location plays an important role on the economic performance of retail
properties due to customer demographics and existence of competitors in the
neighborhood. I will analyze the spatial distribution of retail loan defaults
in California in order to determine whether defaults happen because of regional
demographics.
Retail Loans are commercial loans given to retail property owners. As long as
the business performance of these retail stores are strong, property owners can
collect rents from their tenants and pay the debt service for the loans.
Defaults happen when tenants are not making enough sales to pay their rents.
There are two main reasons for poor economic performance of retail businesses.
First, adverse demographic factors in the neighborhood of the retail property
may cause weak sales, for example customers may have low levels of income or such
a neighborhood is less populated compared to other areas. A neighborhood of the
retail property will be defined as its trade area where 60% to 80% its customer
base is located. As a simplified assumption, trade area will be all the
locations which have at most 30 minutes of driving time distance to the retail
property.
The second reason for weak sales is existence of high competition in the
neighborhood. and this may lead to default even favorable demographics exist in
a retail property's trade area. Having more competitors in the vicinity
translates into sharing potential customers and thus shrinking sales volume.
Hence it is important to distinguish the cause of default for lending purposes.
Because banks tend to avoid extending loans to retail properties where adverse
demographic factors exist, but they may lend to borrowers located in
default-troubled areas with high competition levels if those borrowers have
strong sales volume. Banks have data on the condition of loans with their
location information, but this form of tabular data is not sufficient to
understand why defaults happen in certain areas. By using GIS, spatial
distribution of defaults combined with demographic information will shed light
on the causes of retail loan defaults and will help banks to make prudent
decisions new lending activities in default-troubled areas.
Two markets in Southern California have been selected as the study area for
this project: Los Angeles and Orange County. I use boundaries defined by a commercial
real estate research firm, Torto-Wheaton-Research (TWR), for markets. There are
many retail borrowers in these markets with and without default experiences,
and also demographics factors considerably vary within these markets.
Each retail property will be geocoded, and for those which are in TWR
boundaries, trade areas will be established by using drive-time analysis.
Average income levels and population densities those trade areas will be
computed. Default-troubled areas will be created after examining the spatial
distribution of defaults and the level of competition will be quantified in
these default troubled-areas. Finally, combined analysis of demographics and
competition will be used to explain causes of defaults in those regions.
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