As a part of our retail investment sales and leasing brokerage business, the Progressive Real Estate Partners team speaks to hundreds of investors and tenants each month. We’ve found there are numerous investors expecting the pandemic to result in significant “bargains” on retail investment properties. My gut is that if you are sitting on the sidelines waiting for such an opportunity, you are likely to be disappointed and here’s why:
Lack of Leverage: Most shopping center owners are not highly leveraged. In my 20-years of selling investment properties it is rare for a shopping center or single tenant investor to try and maximize leverage. In general, they are focused on keeping the interest rate as low as possible. I believe retail property investors tend to be more conservative since one of the main reasons they seek this product type is they are focused on cash flow and not necessarily rapid appreciation. Hence, although some property owners have tenants who aren’t paying full rent and they’re certainly not happy about it, they’re not going to lose their investment for that reason.
Tenants Are Paying Rent: Whenever I speak to a shopping center owner, I always ask how their property is performing. Surprisingly, a huge percentage of properties are performing quite well.
- Throughout SoCal, vacancy went from 5% to 6% from the 3rd quarter of 2019 through the 3rd quarter of 2020.
- In the Inland Empire, vacancy went from 6.7 to 8.1% during the same period of time, but vacancy has actually gone down to 8% as of the end of the 4th
Although increasing vacancy rates has resulted in millions of square feet of newly vacant space, as I have previously written, most of it is concentrated in larger spaces that were formerly occupied by big box retailers.
Plenty of Capital: A frothy stock market and record low interest rates have created an abundant amount of capital chasing an opportunity to receive higher returns. AMC theaters is likely one of the biggest “victims” of the pandemic closures AND one of the businesses harmed by the acceleration of disruption within the theater industry (release of movies in a streaming format the same day as released in theaters or bypassing theaters altogether). AMC’s recent raising of $917M to sustain their business model “deep into 2021” should be a strong indication that there is plenty of capital to get the retail community through the pandemic.
Lenders Don’t Want These Properties: The few distressed shopping centers are likely difficult properties such as the regional malls, special purpose buildings, and big boxes. As a result, lenders have a great incentive to work with borrowers by deferring, forgiving, and just cooperating to resolve the situation. The exception might be properties backed by CMBS loans where the CMBS lenders have certain legal obligations and financial incentives to take back properties. But in my experience most retail investors have shied away from CMBS debt due to the experience CMBS borrowers had during the Great Recession.
So What Are the Investing Options?
- Apartments provide virtually no cash flow, but certainly have potential for appreciation. So if you don’t need cash flow, apartment investing has potential, but you better have the stomach for evicting families.
- Industrial has a lot of potential if you can penetrate that market which is extremely difficult if you are not already an industrial investor. And even then you are competing against a huge number of owner/users who can easily justify paying more than investment value for properties.
- Office also has potential if you can buy a high vacancy property, invest a lot of capital to get it leased up and then sell it.
- Stock Market – That is certainly an option but put fresh capital into the stock market these days at your own risk.
- Retail – This brings me back to retail. Instead of trying to “steal a property” or “find a bargain”, if your goal is cash flow, I’d recommend investors consider buying a quality location with a diverse rent roll. Most properties can be purchased with positive leverage resulting in total returns (including principal pay-down) in excess of 8%.
Of course, there are numerous considerations and our team can help you chart the best course to achieve your commercial real estate investment objectives. Feel free to reach out to me by phone or email at 909-230-4500 or brad@progressiverep.com if we can help in any way.
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