Why Commercial Retail?
Remember we are not talking about big box (Best-buy, Home Depot, Office Depot) or malls.Think of one-stop date centers – restaurants, entertainment, and a wide variety of stores. We are referring to the smaller strip mall or neighboorhood centers. And forget Toys-R-Us, Sears, JcPenny they went away for a different reason because their business did not evolve. And this is exctly why you should be interested because the “average-dude” out there does not even consider this opportunity (they just go to MFH… which is why all the dumb money goes there).
You are always going to go to a physical location for nails, haircut (although there are already in-call apps for this), vets, dentists, or pot shops.
Things to look for:
- Long term tenants (10-20 years)
- High mix of service or food and beverage related businesses (‘Internet-resistant)
- Population stats and traffic count (Population 3 mile radius: 25,000+ people, Median Income 1 mile radius: $70k+, Traffic Count: 22,200 and 20,000 cars per day)
- National brands offer lots of equity and will advertise for you (gyms do this too but a little annoying how they take up so much parking)
- What’s the neighborhood like?
- Is there an adequate local population to support retail stores?
- Entrance and egress of the center is critical? Location is more critical than residential real estate.
- Shopping centers should have an anchor tenant. This is a grocery store, drug store, or other big brands that will draw customers and other tenants to the shopping complex.
- If you are doing a value-add deal it will typically take 1-3 years and remember tenants typically get a retail improvement allowance (drywall, drop ceilings, concrete floors, and bathrooms When tenants have very specific construction specifications, just give them money or free rent so the tenant can deal with construction on their own)
- Look for a loan-to-square-foot amount to be $100 or less. (based on a 10-year lease)
Multifamily in a strong market such as Texas is currently trading at a 6-6.5% cap (2018 for Class C & B). Retail (Class C & B) at a 8-8.5% cap, with grocery-anchored centers below an 8% cap.
More data-driven with institutional feeds.
- Some stores will become extinct (think vitamin shops)
- If you buy a triple net leased property the tenant pays for the buildout, you can not cost Seg it out. Also a lot of the B class properties with locally owned and operated chains (mom and pop) business’s that are a chain in that state only will need a significant TIA ( Tenant improvement allowance). That can really kill the cashflow on the property.
- What makes commercial retail work (80-100% plus returns in 5 years) is an operator who has the background as leasing broker who can call upon connections from national chains to fill vacancies. Its a game of networks and unfair advantages.
- Amazon realized that having a brick-and-mortar retail is essential and perhaps why they bought Whole Foods.
- Despite most of us go to a store to try out the latest gadget of clothing and buy it online at home (or on the Amazon app on the way home).
- Stats show that a large percentage of transactions are not online. We do not have flying cars yet…
- Retail facilities have evolved from single-purpose buildings to multi-function facilities (think shopping malls with ).
- America is the country of consumers and our country’s leaders will try to keep it that way.
- Much higher level tenants with deep financial backing (with a triple-net lease, tenants are responsible for real estate taxes, insurance, maintenance, even common-area maintenance like landscaping, snow ploying, security, and lighting).
- The sweet spot to be below institutional investors is 1 to 20 million dollar range
- Leases are longer often 15 years or longer on a single-tenant building (on my SFH portfolio my average tenant stayed only a couple years or so)
- Restaurants do very well with Cost Seg studies. There is a ton of lighting, counters, seating, kitchen equipment.
Insurance companies are evolving and they know a brick and mortar presence is essential.
The brick and mortar effect
More 24 Hour fitness or Plant fitness and less low and mid-grade department stores
De-Boxing is Not De-Best (Source: Green Street Advisors)
Green Street’s retail team conducted a case study of the Sports Authority liquidation and used it as a proxy for estimating how long it takes to backfill large boxes. A minimum of 18 months downtime should be expected when re-tenanting anchor space. Roughly 20% of the REIT-owned Sports Authority spaces were “de-boxed” – meaning the large format floorplate was divided into multiple smaller spaces where tenant demand is stronger and rents per square foot are higher. Not surprisingly, backfilling results were better for centers in strong demographic areas. Centers in weaker demographic areas had to more frequently “de-box,” which generally offers worse unit economics than the original floorplate. Surprisingly, centers in primary markets performed roughly in line with centers in secondary/tertiary markets.
Surviving the Retail Revolution – CP Executive – [Everyone thinks Amazon is going to kill retail (I think mid-range retail like Macy’s is going away) but when everyone thinks one thing that may mean the opposite is true]