Despite Growing Demand, Many Opportunities Continue to Fly Under the Radar
NORTH PLAINFIELD, N.J., Dec. 12, 2014 – The retail real estate investment market in the Northeast has heated up in 2014, with demand for well-located shopping center properties returning to pre-recession levels. According to Levin Management’s Joseph Lowry, director of acquisitions/business development for the North Plainfield-based retail real estate services firm, this ideal investing environment has re-fueled the market for both smaller and value-add assets, following several years dominated by institutional-grade trades.
At the same time, Lowry notes that many opportunities to buy and sell neighborhood and convenience centers continue to fly under the radar. In the following interview, he discusses the market for smaller retail properties, the related challenges and the value of working with an advisor.
Which smaller properties are catching investors’ eyes?
Lowry: Class A, grocery-anchored shopping centers in established retail hubs remain the “darling” of the institutional investment community. However, recently we are seeing more private-player interest in smaller properties – those assets under and around 50,000 square feet that may be unanchored or have a drug store or junior anchor tenant. And because leasing velocity has improved markedly over the past 12 to 18 months, value-add opportunities in this niche also are attracting more attention. However, flight to quality rules regardless of asset size and type. The properties that are trading well are set in more prominent retail locations with strong demographics, and have histories of high occupancy and longer-term tenants. Higher barrier to entry markets with lower retail supply are preferred. For value-add plays, investors are also being highly selective, focusing on under-retailed, infill locations and markets with high barriers to entry.
Why is this a good time for owners to contemplate selling?
Lowry: Interest rates remain historically low (for now), cap rates have compressed considerably and credit is readily available once again. As such, leasing, investment demand and pricing all are quickly returning to pre-recession levels, presenting an ideal time for owners to stabilize or reposition their properties and test the market. There is a huge inventory of solid smaller shopping centers in the Northeast that are highly marketable to private investors within this context. For example, earlier this year Levin Management took on leasing for a small shopping center in central New Jersey. At the time, one, 7,500-square-foot vacancy represented 20 percent of its GLA. We successfully secured a desirable tenant to fill the space and recently began to selectively look for a buyer. Interest has been robust.
What are the challenges in this investment niche?
Lowry: Bringing sellers and buyers together can present the biggest hurdle in these smaller-center scenarios. A significant percentage of properties in this class are privately held, family-owned real estate. While they may not want their properties out on the market publicly, they are interested in selling if the right buyer comes along. On the flip side, investors need to be more careful than ever before when it comes to buying properties. The retail industry is changing, and challenges facing bricks-and-mortar properties – such as the reduction in number, or right sizing of stores by national and regional tenants as well as the growth of e-commerce – require buyers to vet potential investments thoroughly and with a healthy sense of caution.
What advice do you have for sellers and buyers of smaller retail assets?
Lowry: An increasing number of small-asset sellers and buyers are reaching out to companies like Levin Management in an advisory capacity, to assist in alleviating some of the concerns and complexities of the trading process. For sellers, advisors can help improve the position of properties prior to their sale. As with the Central New Jersey shopping center mentioned earlier, this might mean bringing an asset to full occupancy to maximize value, or implementing needed repairs or cosmetic upgrades to enhance curb appeal. Established third-party real estate service providers also will have good relationships with the brokerage community, should a seller wish to go to market, and will know of potential buyers if an off-market disposition is preferred.
On the buyer’s side, good advisors know their markets on a granular level. Their role may include helping investors better understand market specific retail fundamentals, providing market lease rates and other terms. They can also provide demographic profiles for tenants, identify specific shopping center nuances, such as potential at-risk tenants and property deficiencies, and gauge the center’s position in relation to competing and proposed shopping centers. Finally, they can be valuable partners in the underwriting process, assembling capital and expense budgeting information, and other assumptions. And because regional companies like Levin are in the market working with owners, brokers and investors every day, they are frequently the first to hear that an owner is ready to sell and can proactively work to source off-market acquisition opportunities.