Urban low income high population retail property

4 Replies

Hi Guys

I have a deal I am wrestling with, if I should put in an offer on or not. I have a 20k sq ft deal which is currently for sale in Philadelphia. The area is densely populated with 265k ppl in a 3 mile radius, and is lower income in demographic. The center was built in 1990, is in good shape, and is anchored by a Family Dollar. My only concern is that its been robbed I count 4 times in the past 6 yrs.. ie a rougher neighborhood. It’s fully stabilized, so not value add.

Should I stay away from low income/high density areas like this? How should I think about returns in lower class neighborhoods? What about pricing on an asset like this?

You have a national tenant in that shopping center in Family Dollar correct?  How many years have they been there?  How long is their lease? 

 If the numbers crunch properly, I would be hard-pressed to turn down mailbox money especially if the national retailer is paying like clockwork and they also have a cash out plan in place for your property should they end the lease early.

 If I were you I would add value by instalibg new equipment like six or seven visible but unreachable color video cameras across the property. A few extra spot lights.

I would also clean up the property exterior, repaint, repave the parking  put up newere signs.

Sam look up the crime report for the area. Get the police stats from the precinct. You want to see the violent crime levels and if they are declining, staying the same, or increasing.

Family Dollar is struggling right now and not the same as Dollar General for credit.

Define lower income. National median income is about 56,000 a year. Anything below 30,000 is poverty level in a lot of areas.

How do you know the center is in good shape? Have you had a property condition inspection performed on it by an engineer yet? Have you read the leases? You could have an old building and per the leases the tenant do not cover much of any cam costs which can reduce your returns.

The parking lots tend to take beatings in cold belt states and not last as long. Same for the roofs. Have you had an inspection of the roof? Being 1990 it should have had a complete tear down and replacement to the decking and NOT just another layer added on top. The parking lot might have had a re-coat and seal to help with cracking but once it gets so much deterioration the parking lot needs to be milled down and redone.

New roof and parking lot that size of a building can be hundreds of thousands of dollars to replace. This doesn't include if landlord is responsible for HVAC and other items.

There is a ton to analyze with these types of properties. Either get you a great commercial broker with experience, a retail commercial attorney, or both.   

@Joel Owens . Thanks for the thorough response. Median income for the area is 53k vs 57k nationwide. Unemployment is 10.8% vs 3.8% nationwide.

My comment around “in good shape” was just a generalization as I haven’t put in an Loi yet or am I in due diligence to do a proper inspection.

You’re right in the CAM on the Family dollar is paid for by the landlord... the rest of the leases in the center are triple net. Family dollar is a lower quality tenant agreed, for what it’s worth they did a unit remodel in 2016.

Back to my question, I don’t know if lower income is not worth bidding on. Do you have to price in a higher cap for the area as a result? I have always been told buy in high income, with population density in a good location.

I believe in value of the land first for dirt value.

The difference in cap rate would have to be really high to offset not owning in a better area. Sometimes just like with houses it comes down to price. An A area center might be 4 to 5 million and a C to D area with lower rents and older building might be 1.5 to 2 million in price. 

The best areas will tend to be in demand when you go to resale. You need to look at market comps by box size to see if at market, above, or below. A 7,000 sq ft space should not have the same rents as a 1,200 sq ft space. If you have vintage leases with inflated rents at a so called higher cap rate then if tenant leaves the second generational tenant will likely not pay that lease rate so you have an immediate cap rate drop on income based on what you originally paid.