Cap rate on retail strip with three units?

Question

I need some help figuring out the appropriate cap rate on a three unit retail strip center. It is right next to a Walmart in a small town. It was built in 2013. None of the tenants are major retailers. They are asking 7.5%. I have feeling thats still low, thoughts from those with experience on this.

Jimmy Klein · Answer

Asking price is $1 million. NOI is $75,000. I don't mind paying a 7.5% cap given the leases are long term and its next to a Walmart. As far as downpayment, I am thinking 25% down. I wouldn't even mind do a smaller downpayment and having the lender sweep excess cash to quickly pay down debt. The issue is that I would really prefer to get non-recourse. It's just that the deal is too small for that.

Joel Owens · Answer

For the lease you could have the parent company be a 6 billion dollar company but if the guarantor for the lease is a small franchisee that just started with low liquidity and net worth then it doesn't mean much.

Listing brokers often PUFF the parent companies in their offering circulars. If they are not on the hook for the lease it doesn't mean squat.

Joel Owens · Answer

I don't care about the name brand. It's all about who guarantees the lease.

Yeah I do not see a 9 cap on a new build. Brand new builds generally sign national tenants.

If I am a national developer my land costs and building construction with resale has break even at a 9 cap and I sell to the market on a 7 cap or 7.5 cap and that is my profit margin. I am not going to do all of that to break even.

So I thin you really need to be realistic with expectations. Why not buy a center that is 5 year sold etc. where you can land  a better cap in a quality area??

Center doesn't need to be brand new.

What is asking price for the 3 unit and how much are you putting down??

Jimmy Klein · Answer

Actually, they are not mom and pop, they are just not large brands. One is a federal credit union. The other two are wing stop and great clips, they are franchises. Its located in a midsize town in South Carolina. I am really looking for a 9% cap rate. I know its tough on a new build, but may take a lower one on this since the lease for two of the units extend out until 2024.

Joel Owens · Answer

3 unit is unusual as they are generally larger in size about 6 to 10 units for small strips.

Built in 2013 you are saying they are all mom and pop tenants which is also not the norm on new product.

Some areas are cap compressed. For instance in GA you can get a strip center at a 9 to 10 cap. In New Jersey they are selling in the 6's to 7's. For a brand new product in 2013  7.5 cap isn't that bad.

What area is this in and what was your expectation on a cap rate for a new build??