Please help me evaluate this retail center deal

7 Replies

Hi All,

I'm new to commercial, have been wanting to get into either retail or multifamily value add.  I want to give you some info on a deal that was sent to me to get your thoughts and input.

Purchase Price: $1.25M
Total building SQFT: 12k, Built in 2001
Located in Houston, TX
90% Leased (80% is a national dollar store chain, 10% is a national pizza chain)
10% is vacant
Current Cap rate is 7.75% with taking into account the vacant area.
Dollar store has been there since building was built and lease expires 2022, with 3 and 5 year options
Pizza chain has been there since 2015 and lease expires in 2020, with 2 and 5 year options
Rents for both tenants have been the same since their lease inception with no increases.  The Dollar Store performs above average from a revenue standpoint (they have to report their sales as part of the lease agreement).
Brochure says the NOI is $98k.

I like that they are great tenants, mostly rented, only small space to get filled out.

I don't like the area it is in.  It's not super high income, less than $70k and the area would be considered outskirts of Houston, so growth in housing and development is going to be very slow.

I'm new to retail, but I want to buy something that I can increase the value on in the next 2-5 years.  The only way I see that I'm able to increase the property value here is to get the 10% vacancy occupied and increase rents for the dollar store.  They are paying $8.xx $/sqft per year, and I believe that rate was locked in from the initial lease signing.  So assuming I could raise their rents at renewal (2022) then I should be able to appreciate the property some more, but that's still quite some time away.  If I try to raise too high, they may leave, which would be a huge strain on the property.  I'd have to invest money to split up the space and rent out to individual tenants.  That would be good for the $/sqft/yr because the pizza place is paying around $17/sqft/yr for less than 2000 sqft.  So that would be another way to potentially increase rents.

What are your thoughts on this deal?  What am I missing or overlooking?  I'm in my early 30's, I'm not looking for capital preservation, but want to grow the property value over time.  

Thanks! 

me personally I think that the retail business is going to slowly decline over the next decades because as prices rise due to inflation and the rising operating costs- means tenets will no longer be able to keep the operation open due to the constant decressing rates of return for business's. If thier isn't enough profit than they will move out and thier products will be sold at big box stores like walmart and even online since thier marginal cost is so small. If I was you I would buy a multifamily in a c+ B area as long as it cash flowed nicely

Companies like Amzn, Walmart will tear Dollar Store apart left and right. I like the idea to find other opportunities. Cap rate looks good though. Not sure what Houston avg commercial operates.

My concern would be losing the major tenant and having a long term vacancy. Commercial can take a lot longer to lease than residential. Are you paying cash or financing?

This sounds like a good deal for a more short term hold but with these long lease contracts, raising rents in the short term may be difficult. Also, you are heavily dependent on a single tenant (like SFR) which is never good.

Originally posted by @Sam Shueh :

Companies like Amzn, Walmart will tear Dollar Store apart left and right. I like the idea to find other opportunities. Cap rate looks good though. Not sure what Houston avg commercial operates.

 I disagree with that prediction. Amazon has been around for years, but Dollar stores continually prove that their customers do not shop online. They don't pay for Prime and they value convenience over saving a few bucks. they are the poorest, but perhaps that is another discussion.  Dollar General Hits a Goldmine

This is a pretty run of the mill deal.  You can find these all day long.  If one/both tenants don't renew, you are left with some pretty costly dirt.  I would recommend you pass on this.  If you are young trying to grow capital, this is not the deal for you.  Since you are young, find a value add deal, not one that simply yields mailbox money.

Better yet you have to think many times before you make decisions. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.