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Colliers’ Warner: Why Cash is King in Current CRE Retail Market
By Dennis Kaiser
The retail industry is undergoing a significant transformation, yet from an investment perspective, the sector presents a compelling alternative to other CRE asset classes. Connect Media asked Colliers International’s El Warner to break down the dynamic of why cash on cash returns rule in our latest CRE Q&A.
Q: Why do you say cash on cash returns on retail investments is king today?
A: In the past three years, many misconceptions have risen with the retail product type often being unfairly characterized by the fate of a few retailers. In truth, 75% of the retail store closings were the product of only 20 repeat offenders. This small sample size of nonprogressive brands created an environment where today, the risk adjusted returns in retail investments far exceed any other product type. While interest rates have compressed cap rates to sub-4% in several different product types, the 6% cap still exists in high performing, well-located retail centers in urban markets. While some investors are taking huge bets on market rent growth in apartment and industrial sites, others see the opportunity in retail and consider it an ideal asset class; if for no other reason than betting on cash instead of rent appreciation. It would be a fair question to ask: Why not? After all, what better way to judge an investment than with what you earn every month from the amount that you invest.
Q: Where are you seeing the best deals? Why? What are some of the key considerations for those deals?
A: We see so many opportunities for all different types of investors. Here are a few of my favorites:
A trophy single-tenant grocery store selling at a 5.5% cap rate with a 20-year lease, strong sales and no management responsibility providing 8% cash on cash returns (3.5% I/O Debt). (example listing: Albertsons Fallbrook)
The shadow-anchored strip center for a 6% cap rate with small unit sizes, great layout, strong anchor sales and excellent cash on cash returns. These 20,000 to 40,000-square-foot centers have historically very low vacancy rates and potentially below-market rents due to market rent increases in excess of contract rents. (example listings: Bouquet Canyon & Glendora Marketplace )
The community center with below market rent and slight big-box risk, with potential lease up of 10% vacancy in secondary markets. The assets traded at a 7-7.5% cap rate will allow a buyer to create some value with an equity partner and generate mid-teens leverage IRRs. (example listing Marketplace at the Lakes)
Q: Can you cite a few examples of who’s buying and where?
A: We are selling all three of these types of assets noted above, and the buyers are either exchange buyers moving money out of other product types to increase cash flow and decrease management responsibilities, or regional buyers who have the knowledge and expertise in retail to manage the potential risks associated with the asset class.
To be sure, it requires experience to mitigate around potential risks. Though by comparison, I do not see any asset class that an investor can generate an 8 to 10% cash on cash return for a stabilized asset with very low risk and both short-and long-term rent increases.
I believe all types of investors are looking closely at retail across the country. For the first time since April 2015, I predict that cap rates for retail will see a decrease in 2020, as investors start to see the trend and the benefit of owning this asset class as a competitive substitute to other overvalued asset classes.
For comments, questions or concerns, please contact Dennis Kaiser
- ◦Sale/Acquisition
