Retail Investment Long Term

8 Replies

I'm currently in the market for retail buildings with 10%+ cap rates with solid NNN leases with 5+ years remaining.

Is there a certain type of retail that is "recession proof" or is an extended corporate backed lease enough to mitigate any risk of down turn? 

It seems like fortune 500 companies like Walgreens, Rite Aide etc. seem to be less risk than say a small dental office. 

It's less about the tenant and more about the area, the dirt, and in place rents.

If as an example you buy a 10 cap value add they could have inflated rents when the developer originally built it. So you could have a 10,000 sq ft box with 25 a foot in place rent when the market is paying 20. Now if they leave your 10 cap becomes an 8 cap.

There are ways to research if the current tenant is going to stay. They usually want something in return for doing a blend and extend. I buy these for myself. I also locate them for clients but purchase price needs to be 2 million or higher. Sub 1 million stuff is not worth my time to find for someone else as barely any commissions to be made. If I buy it for myself that makes sense but not brokering it.   

Thanks Joel, I'm currently waiting on a purchase agreement but the seller is taking longer than expected. If it was earlier in the year we might be able to work together. I'm buying for tax purposes and we don't have much time to close on something. Purchase price is $2M+, NNN, great location and large parking lot. Tenant has been there 20 years and exercised a 5 year option.

This would be my first retail investment which is why I'm looking for insight. Not working with an agent since the ones I've come across aren't that helpful. I just like the simplicity of retail and having one long term tenant. 

@Mark I Muhn

I'm a retail/medical/office investor and I absolutely love the asset. I'm just completing a 10,000 sq ft space outside of Austin and will have 1 tenant for 7 years with renewal options and 1 tenant for 10 years with renewal options. I developed this space to hold long-term.

There are some businesses that tend to be recession proof, but you really just want to focus on your tenant. There's money to be made in tougher cycles and if your tenant has been in business for a long period of time, they likely have staying power, although you should get to know their business. Publicly traded companies are great if you can secure them because there's a significantly decreased rent of rent default given their size and balance sheet. However, they sometimes want higher TI allowances or other steep provisions because they know their position in the market.

If the property is in a solid area and you've got a strong tenant, you're likely in a good spot. You'll just need to decide if you want cash flow, appreciation, or debt pay down. Because cities can change and new space is developed all the time, I try to focus on debt pay down so that I can be as flexible as needed in the market if gross rent prices change. Just depends on your market.

I didn't think it was possible to buy a strip in a populated urban area, where the tenant is well established, Internet/recession proof, NNN, long leases, below market rates per sq' at 10 CAP.

I will say this. I have a 3 store strip in N Jersey, and when a place is vacant it’s empty for a year. So make sure you have staying power. 

It's in the center of town. Flanked by two train stations, flanked by two schools (private and public) adjacent from a Chase and a Wendy's. Parking lot, NN, 5 year leases. I jumped on it at a 6 CAP during an 1031.

Originally posted by @Michael Jones :

@Mark I Muhn

I'm a retail/medical/office investor and I absolutely love the asset. I'm just completing a 10,000 sq ft space outside of Austin and will have 1 tenant for 7 years with renewal options and 1 tenant for 10 years with renewal options. I developed this space to hold long-term.

There are some businesses that tend to be recession proof, but you really just want to focus on your tenant. There's money to be made in tougher cycles and if your tenant has been in business for a long period of time, they likely have staying power, although you should get to know their business. Publicly traded companies are great if you can secure them because there's a significantly decreased rent of rent default given their size and balance sheet. However, they sometimes want higher TI allowances or other steep provisions because they know their position in the market.

If the property is in a solid area and you've got a strong tenant, you're likely in a good spot. You'll just need to decide if you want cash flow, appreciation, or debt pay down. Because cities can change and new space is developed all the time, I try to focus on debt pay down so that I can be as flexible as needed in the market if gross rent prices change. Just depends on your market.

 I recall your other posts, where is it? Georgetown or Cedar Creek?

Hi Mark,

Most agents would not be that helpful. Reason is because the nature of many commercial real estate firms. They focus on the listing side and volume. They take reduced commission fees and then want a hand off with very little work involved.

Example: 100k commission. 50k goes to brokerage. Remaining 50k split between senior director and junior agent. Top dog gets maybe 27k, middle 14k, junior 9k. They have to do about 5 to 10 deals to my one deal as I get it all at my company. So typically they only sell you the buyer on what they have in their inventory whether good,marginal,or crappy property.

My business model is completely different. I work with buyers exclusively and my proprietary database built over 16 years to find the diamonds.

Are you paying all cash at 2 million? Lender will usually give very short amortization schedules as they want almost all the cash flow going to service the debt with just 5 years remaining on primary term. They want loan amount to be less than dark value so if tenant doesn't renew in 5 years and you cannot re-tenant then lender can foreclose and be made whole on the loan after legal costs etc.

Buyer often sees high cap rate and then disappointed when all the cash flow going to the lender. You accumulate equity faster but not usable cash flow much. 

  

@Joel Owens Lender terms are 25% down at 4.5%. I'm definitely curious how things will play out in 5 years. Maybe before the lease expires I will get a feel for if the tenant will renew. If I feel like they will bail then sell the property? Seems like there are options unless I'm underwater somehow. At 10% cap there should be plenty of safety net to grab a new tenant. 

My tax strategy focuses more on the front end. If I have $1M income this year it seems logical to do cost segregation and save the $400k tax bill. Hard to imagine I can lose more than $400k when this property will cash flow $120k per year pretax income.