I've been researching Strip malls that range from $2.5mm to $4mm. Under 10 years old, good traffic counts and in growing areas. In this range, the name of the game seems to be get it 100% leased then sell for an 8.5 cap.
I construe this as a pretty high risk investment. If a tenant leaves or rates rise, what little profits you have are wiped out. I know while things are good, the tenants are paying down a large mortgage and there can be a light at the end of the tunnel. Below are two examples of Cincinnati Strip malls: Give me your thoughts on strip centers. Would you spend your money on investments like this at 8.5 caps? Thank you all!
Usually on these with 25% down breakeven occupancy is at about 62%. So you have to lose about say 4 tenants out of 10 in a strip center to start taking money out of your pocket.
You have to analyze are the leases staggered so they are not coming all due at the same time. Also traffic count on the road doesn't matter if there is a median and most of the traffic is blocked from getting there. Good sightlines are important as well as the mix between national and mom and pop tenants. Knowing you do not have vintage leases above market fixing to roll down and be renegotiated or the tenant leaves to a cheaper per sq ft base rent center in a similar quality of location.
If you have 20,000 sq ft for instance with 10 tenants a balance of smaller spaces is better. You wouldn't want a junior box of 6,000 to 10,000 sq ft because if they go out as a mini-anchor you are negative cash flowing. If you do have a large tenant you have to underwrite them very hard. If a national tenant with parent corp guarantee there is greater security. If it is a franchisee then you need to get sales for that location. Compare that to the national average for the concept and see if above average, average, or below average for the location. Restaurant you do not want at more than 10% annual gross sales to rent ratio. If you see sales are suffering and ratio Is high then tenant renegotiation on the lease is in your future for loss of cash flow with the write down. The smaller tenants around 1,000 to 2,500 sq ft can release in a few months. The junior to large box can take 6 months to 1 year even for a good location before they start paying on the lease. Even if a forward commitment is signed the TI and rent credits have to be negotiated and interior build out and CO has to be issued before the tenant will want to start paying rent.
Many other things to consider. I love retail strips. You just have to completely understand them and how to underwrite to hedge proper risk just like any other asset class. I have multifamily owners who call me wanting retail and they only know 2 to 3 things for reviewing a retail center whereas I have a very long list.
@Joel Owens - I have to tell you, I have spent countless hours researching as much as I can about strips. The metrics you listed above are very helpful. I am grateful that you take the time to help all of us. If I may keep pushing with few more questions:
How many years do you amortize for your analysis?
For a strip in this range, do inexperienced landlords usually outsource the leasing/management?
Do you or would you consult out of state clients on deals in their state (e.g. Ohio)?
Is it silly to only look for deals like this in your own backyard and not out of state?
Thank you again Joel!
I transact and have clients all over the country. I used to deal with overseas buyers but unless they have their ducks in a row and already know about entity creation, additional tax withholding, currency exchange rates, and how to get their money over here from there then it's a no go. I have head deals fall apart in the past and so have many other commercial brokerages.
I have enough buyers in the states to invest where we do not have to overcome those things. Many other commercial brokerages feel the same way based on past experience. Now if it's a large foreign corporation that has figured it all out and has already bought many properties then that is different from an individual investor. I still work with overseas buyers but I am very selective when I take them on.
Years of amortization depend on the loan you can get. That will depend on the asset quality of the location and loan size which will determine regular bank, life insurance lender, CMBS, private non-bank lending group.
On CMBS we can get 30 year amortization fixed in the 4's for rate for 10 years. CMBS is more expensive to originate than a regular bank loan. To get non-recourse most lenders want a minimum of a 2 million loan. That means a purchase price of about 2.8 minimum with the 25% down payment. A non-recourse lender will REQUIRE a known property management company to run the strip center as foreclosing is their only option along with possibly a loan workout.
Banks are more lenient on your loan with the cash management requirement but generally have full recourse against you. So if you have a problem with the property down the road they say tough you have a lot of money keep paying the note.
Positives and negatives to everything. The banks usually have 3 to 5 year fixed loans only at 20 year amortization but have been getting more aggressive lately trying to compete.
You do not have to buy only in Ohio. Some feel more comfortable close to where they live and bragging right to their friends etc. Others want it in a vacation destination so they can go there a few times a year and tax business tax write offs. Some buyers never really see the property much in high quality areas.
My personal opinion right now is I see retail strips compressing in a few years just like multifamily did. Lot's of value here. Usually someone contacts me by e-mail and we set up an introductory phone call. From there I review goals and financials and see what might make the most sense for what they are trying to do.
When you say retail strips are compressing in a few years do you mean the cap rates?
Steve yes I believe they will compress just like SFR,STNL, multifamily did. Different asset classes cycle at various times.
Right now I see 2 years or so left for buying strip centers at great pricing. After that industrial and office is starting to get hotter but I do not invest in those properties. I like multifamily and retail for my 2 niches but multifamily is over compressed right now so not doing as much in that space currently.
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