I think the single biggest opportunity for commercial real estate investors across the United States over the next decade will be in investing in service oriented retail shopping centers.
When I say service oriented, I am referring to what investors in the industry call neighborhood or community centers. These are centers many times anchored by drug stores or supermarkets.
They contain food and restaurant, medical, and service based tenants. In my opinion, these types of assets are a completely different type of product type than the regional malls and retail power centers that are being punished by eCommerce like Amazon. Here is why I am such a bull on this sector:
- Deal Flow – Because of the fear of the Amazon effect, all retail assets are being punished, as valuations creep lower and cap rates move higher. While I can understand investors sentiments when it comes to the “big box” type assets, I feel service or destination oriented assets are being unfairly punished , creating tremendous buying opportunities nationwide. From an economic thesis standpoint, I think apartments are a great place to invest in over the next decade as well, the problem is that cap rates are so low that there are very little buying opportunities. With the right retail centers, not only do you have many more deals that make sense, but I think you will find comparably durable income to multi family assets.
- Tenant Product Offering – Doctors, grocers, barbers, and restaurants are not going anywhere in the near future. These offerings are necessities, plan and simple. As long as people continue to need these types of products and services, I think that retail assets are a stable place to park capital. And if there are any “traditional” type retailers in an asset, I prefer them to be discount oriented, like a dollar store.
- National Tenants – I love credit tenants. They pay on time and are usually very easy to deal with. Credit names mean lower cap rates and higher valuations when it comes time to sell.
- Long Term Leases – Retail lease deals typically are longer than lease deals in other asset types.
- NNN Leases – Of all asset classes, retail centers are usually the most likely to have their leases structured as NNN, taking significant risk off of the landlords plate.
- Location Based – Location on a very local situs level means more in retail real estate, than any other asset class. Stores in well located centers do better than stores in poorly located ones. In the retail business, you are really in the real estate business, more so than office or industrial assets. From an acquisition standpoint, this almost can ensure your success. By only purchasing well located assets, you can significantly reduce risk.
- Ability To Move Tenants – We have many of the same tenants in our centers. You can leverage off a relationship you have at one center, to place them in another center.
- Ease of Management – In all of my years running commercial real estate, shopping centers are easier to manager than any other product type. These centers are also much easier to run remotely than other assets as well.
In closing, I think that destination, service based centers represent a great buying opportunity right now. From a risk adjusted return basis, I think you can “make your money on the buy” and find deals that make sense from a valuation basis, but at the same type get a durable income stream that will continue to pay dividends for decades to come.
All of that being said, I am not recommending buying any broad sector. You still need to find the right assets at the right prices, but from a macroeconomic standpoint, the market has presented us with a major opportunity in this product type.