Opportunity – Retail Centers
Over the last several months, my articles have highlighted deals in the investment markets (hard-assets) today. I mentioned retail centers briefly in January. This month’s article will discuss the asset class in more detail.
Instigated by the slowing economy, and aggravated by some high-profile corporate bankruptcies (think Circuit City and Mervyn’s), retail centers are seeing dramatically higher than normal vacancy levels today.
Since commercial properties are valued based on the amount of money they generate, a GOOD property with temporarily low occupancy could represent a bargain purchase. Lower prices today provide an opportunity for investors. The business plan is simple here – buy when income (and value) is lower, and sell when it’s higher for a profit.
Why is GOOD emphasized in that paragraph?
That word is emphasized because it is a crucial point. Missing that point could be the difference between a successful investment and a big loser. A good property may have lower occupancy due to today’s slow economy. A bad property has lower occupancy because it’s a bad property.
Good retail properties are located in growing areas populated by residents with disposable income. These properties are well-maintained and have ample parking with good street visibility and easy access. Such properties are in submarkets with lower vacancy rates, and significant barriers to entry. A lower vacancy rate and higher barriers to entry mean less competition among landlords for tenants.
While a good shopping center may have all of the above characteristics, a bad center only needs one or two of the following drawbacks:
The site could be in a place (think Detroit) where population and/or disposable income is shrinking faster than normal. The building may be in physically poor condition, or may suffer from functional obsolescence. This term describes buildings that no longer, (or never did in the first place), have features that your target tenants desire. An extreme example is a structure without an air-conditioning system, (they do still exist out there.) More subtle are properties that lack adequate parking or ADA compliance. The site could have environmental issues, such as soil contamination, or the building could just be too small for today’s users. For example; the larger grocery stores of the 1930’s put smaller grocers out of business, but a modern supermarket needs to be 5 times larger.
An example of a building that never appealed to tenants in the first place is a two-story retail strip center. Such properties are not often very successful in the United States, due to decreased visibility and impaired access. One exception seems to be predominantly Asian neighborhoods. These centers are thriving in cities such as Monterey Park and Rowland Heights. That two-story strip center may have a vacant floor on top because nobody will ever want it. Buy multi-story strip centers outside these areas at your own peril.
How I Prefer to Invest in Retail Centers
A good grocery-anchored retail center here in California could cost $15 million or more. Even for wealthier investors, such a purchase could represent a substantial portion of their net worth. I prefer to invest using various partial-interest options available in the market. Using such offerings can allow an investor to create income and appreciation potential without putting $8 million down. An investor can use such an offering to buy an interest in a single property, or one in a portfolio of retail centers. The second option allows him to spread his risk among many assets, rather than put “all his eggs in one basket.”
If buying retail centers sounds interesting to you, then perhaps it is worth learning more about.
Securities are offered through Private Asset Group, Inc. Member FINRA/SIPC. 3070 Bristol St. Suite 500, Costa Mesa, CA 92626. 714-545-5002. Specialized Wealth Management and Private Asset Group are not affiliated. This document does not constitute an offer to sell, nor is a solicitation of an offer to purchase securities. Any such offer shall be made solely pursuant to a Private Placement Memorandum. All investments have MATERIAL RISKS. Past performance is never an assurance of future results. Investors must read the SPONSOR’S Memorandum paying particular attention to the section on RISK FACTORS before they invest and for further disclosures about terms, risks, etc. Please consult a qualified tax advisor for specific tax issues.
Christopher Miller is a Managing Director with Specialized Wealth Management in Tustin, California and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator, and as an advisor helping clients through over two hundred 1031 exchanges. Chris has been featured as an expert in several industry publications, and on television, and earned an MBA emphasizing Real Estate Finance from the University of Southern California. Call him toll-free at (877) 313 – 1868
