Hey Guys,
Long time reader here. This forum has been a great read so far.
I have an interview coming up with an opportunistic fund focused on acquiring shopping centers. I'm looking to gain some general insight on shopping center intricacies. I am aware of some of the retail terms, such as: breakpoints, sales psf, % rent, and sales kick outs. Here are some questions I have:
- What databases are used for retail rent comps (i.e. streeteasy for NYC apartments)?
- Types of reimbursements?
- Are there any tax credit, or tax-exempt financing opportunities for this type of property?
- What differences are there between underwriting retail (specifically shopping centers) vs. office properties?
- Will my basic ARGUS modeling knowledge in office properties transfer over to shopping centers?
- Can an Analyst gig specializing in shopping centers pigeon hole me in retail properties?
I would really appreciate those with retail experience to answer some of these questions, or to add in some other important points on shopping centers. Thanks in advance for your time!
Since no one else has chimed in, I'll answer what I can answer.
CoStar is a widely used source of CRE data; however, for very specific lease comparables, I've generally gotten the best information from brokers. How does one get information from brokers? Get on all of their mailing lists for new listings, sign confidentiality agreements, and then mine their data. I've got phenomenal (as in, highly relevant and very detailed) office and retail comps through this technique without ever talking to a human being (except for the occasional follow-up call gauging my real interest). Frankly, I wouldn't trust database information over primary source information.
As far as tax credits, new market tax credits (NMTC) would cover developments into under-served or low-income communities. Although it looks like you're in NYC, so be aware that NYC has the most complicated and comprehensive tax credit and affordable housing programs in the country, so that will require its own expertise. I believe Freddie Mac, for example, has a NYC multifamily group that specializes in only NYC because it's such a complicated city with regard to, well, everything real estate related.
Yes, your Excel and/or Argus skills are very transferable between retail and office properties.
I am not a retail expert, but to piggyback on DCDepository's last point, retail can be one of the most complicated asset classes from an ARGUS perspective. (Complex and varied expense reimbursement methodologies, etc.) It can be very helpful to have retail modeling experience as it is likely as (or more) complicated than other commercial properties you may work with.
As DCD said, signing up for the marketing materials from brokers is the best bet for comps. Additionally, many of the big firms (especially C&W) release retail market reports pretty often. You can even Google search for these reports, such as the most recent one for Manhattan, here: http://www.cushmanwakefield.com/~/media/marketbeat/2014/10/Manhattan_AM…
One of your questions kind of answers another. Expense reimbursement is one of the big differences in underwriting. Office leases are typically gross leases, whereas retail leases are typically some form of net lease. Landlords aim for triple net (NNN) leases where the tenant reimburses operating expenses (mainly CAM), insurance, and real estate taxes. But the amount of reimbursement in reality varies a lot depending on how savvy or important the tenant is. Anchor tenants with a lot of clout as well as seasoned national tenants will often demand leases where they only pay the annual increase in expenses over a base year (the year their lease begins). Savvy tenants may insist that the amounts that certain or all expenses are allowed to increase, annually, be capped. For example, they may only allow a 4% annual increase in their share of expenses. Anchor tenants may even demand a gross lease or single or double net.
The thing that makes retail so interest and so complex compared to other asset classes is the relationship between tenants. While an office anchor tenant certainly will attract other tenants, it does not have the same effect on the property as a retail anchor tenant. In general, retail tenants' fates are much more intertwined. As such, retail leases will often have clauses that relate to the other tenants. Kickout clauses, where a tenant can leave if 2 of the 4 anchors vacate, for example, or if overall vacancy drops below a certain hurdle. Exclusive use clauses that say that this tenant will be the only dry cleaner or the only athletic shoe store that the landlord allows in the center. Oh, that reminds me! The landlord is much more affected by those uses. Dry cleaners and gas stations can cause adverse effects on the environment, which must be considered as well. Regardless, a retail center is all about finding the perfect mix of the right tenants.
Other considerations... Retail landlords are very concerned with the success of their tenants. Obviously, an office tenant who does poorly is in danger of vacating and one that does well may ask for more space. Retail is the same. But in addition to that, retail sales have a greater effect. If they drop too low, many tenants have kickout clauses that will let them vacate with no further obligation. And if they are successful - many tenants pay percentage/overage rent, in addition to their base rent. Unfortunately, if the shopping center is struggling, you may even allow some of your tenants to pay percentage rent in lieu of base rent. A tenant paying 8% of sales and no base rent is better than a vacant storefront in a struggling center.
I think the differences in Argus modeling are not too bad, however, I do think that career-wise you can pigeonhole yourself in retail. My personal experience has been that going from retail to office has been somewhat challenging. Probably the same from office to retail. But, the takeaway is that there is plenty of opportunity to stick with retail and if you find it the most interesting asset class, then why not?
Thanks guys. This has been very helpful.
@DCDepository- I am based out of NYC, however, the firm is looking at shopping centers throughout the US (they currently do not own a single one in New York state). Any other funding available that you can think of aside from NMTC?
Does anybody have experience with the development process of shopping centers? Are these shopping centers (generally) developed spec, or until they have a few anchors locked-in?
Can someone please list all of the potential CAM expenses, reimbursements, and ancillary incomes for shopping centers?
How is due diligence done for these shopping centers? Any databases available for traffic count?
Generally, developers are trying to get an anchor tenant to commit for shopping center developments. For example, my organization owns a piece of property and we're trying to get a grocery store to commit to the site before we break any kind of ground. I would say that's generally the rule, but there are some exceptions I can think of even off the top of my head.
In addition to NMTC, affordable housing tax credits could impact mixed-use developments, so they are relevant. In addition, historic tax credits could impact you for certain older properties you're looking to re-purpose or salvage. I'm sure there are other state-level tax credits or other incentives or subsidies.
I might be a bit late to the party but I work for a small REPE/development firm that focuses in retail.
To answer some of your questions:
In the development projects I have been involved with, we have had anchor tenant leases signed with pre-leased occupancy above 80% and spec built smaller buildings that we felt confident would lease up. Another reason why it makes sense to have a few anchor tenants lined is that it will allow you to get favorable construction/perm loans. If I am a life company, I wouldn't want to do a perm loan for a developer that has to navigate through too much risk. Feel free to PM me and you may also want to check out the book called Real Estate Development: Principles & Process.
CAM expenses are pretty similar for all shopping centers but some may vary by region (i.e. snow removal in the North, hurricane/flood insurance in FL, etc.). Overall, I would say the most common are site utilities, lot cleaning, insurance, trash removal, security, landscaping, plumbing, HVAC repairs, lot striping etc. Most of these are reimbursable. However, some leases, especially anchor tenant leases, may dictate what items are reimbursable.
There are many ways to increase revenue through ancillary income. For instance, you can do anything from cell towers, renewable energy (solar panels, EV charging stations), pop up-retailing, renting parking spaces to businesses next door, wifi hotspot subscriptions, leasing parking lot areas during lunch time to food trucks, billboards, etc.
Most deals have due diligence materials included that you use to decide whether to pursue or not. You may then visit the site, request more info from the broker/owner, etc. You can also have third party sources prepare market studies that include traffic counts or use your network of engineers to retrieve traffic count data.
Hope this helps.
Agree with most of this, current demand for good shopping center space makes pre-leasing development projects less challenging. I work for a retail REIT and we have built a few centers in the past couple of years, I would say there aren't many being built that don't have 3-4 major tenants already signed on before breaking ground.
As far as CAM expenses go, I would add that HVAC repairs are typically the responsibility of the corresponding tenant in my experience unless you're talking about an enclosed mall CA. Facade paint/maintenance is another big one.
CRE also listed some great ancillary revenue sources, I'd add advertising/marketing as a major stream. I see electronic reader boards/billboards and pylon sign screens being implemented all over. Normal pylon sign spots are also a great place to make ancillary income. Often some of the biggest players in a shopping center will build free spots into their leases, the rest typically won't and you can get bidding wars going for the remaining vacant spots. Then you have non-traditional leasing like putting a halloween store in a vacant unit, or leasing an outparcel to a christmas tree seller for the month of December, etc.
I've underwritten many shopping centers and as others have said the hard part about argus modeling them is the number of tenants in large shopping centers are much larger than a regular office building due to many small tenants taking small spaces. Also the reimbursements get tricky especially dealing with individual base years or a mixture of reimbursements some tenants are net other MG, etc.
So how do you typically handle these complex argus models and go through them? Are you usually looking at them from the debt side or equity?
Thanks guys. I really appreciate the insight.
I am also trying to learn about modeling a retail shopping center...could someone direct me to a retail template just so i can understand what investors focus on? Thank you!!
ANyone?
Anyone Underwrite Big Box Retail? (Originally Posted: 04/16/2015)
We've developed Walmarts/Sams/Home Depot/etc but I've never had to underwrite an acquisition for free standing big box's. I was just handed an assignment to underwrite a package of Lowes/Home Depot locations but I'm having a hard time finding market research since they really don't seem to fit the retail archetype found in most market literature. They're all freestanding locations, some in retail "parks" where you drive down a road and you get to a mega walmart or something like that.
For those that have acquired this type of product, what benchmarks do you use, where do you get your research from, any tips.
Thanks
Those are such a pain in the ass - there is a balance that needs to be struck between underwriting it as retail and the core of what the business is and how it is doing in that location.
Cap rate deals. Premium for location. Only comp Walmarts to Walmarts, Wendy's to Wendys, etc. due to credit rating. As for cash flow, NPV the remaining lease term. To find if the lease is above/below market underwrite the land it lies on as unimproved (development) and take 4%-6% of the value NNN per year would be the lease value. A lot of guys will 1031 into deals like this to avoid taxes as big box retailers or restaurants offer stabilized long term cash flow.
^^^^ look at what walmart/sams/home depots, etc are trading at in the net leased market. only comp walmart to walmart etc. pretty much a bond. also if they have debt trading (term loan, bonds, etc), look at the spread on that - can be a decent benchmark (i.e. if their debt is trading much wider than your cap not a good sign)
This may be a dumb question but where do you find information about where a company's debt is trading?
I'm sure you've already finished this but for reference sake, I would confirm what everyone else said. I underwrite most big box retail in the NNN lease market and its very vanilla. I've never heard of using NPV to evaluate the future income in the lease though. Usually just stick to seeing what they trade at + credit rating + market location. I've never done a Walmart before, but I just underwrote a brand new 25yr NNN CVS in the middle of nowhere at a 5 cap. Client is pushing for 4.75.........greedy he is
Bump. Anyone have any input about the above? Like I said, maybe I'm missing something, but I can't seem to find a source for corporate bond pricing. Thanks.
You are going to need a terminal or a friend with one.
Thanks for the response. Anyone want to be my friend?
I'm mainly interested in some historical data for a few tenants/companies.
For large shopping centers (1M SF+), what is the typical annual rollover from a percentage point where it's normal and expected vs. what level is considered high/notable? Is 5-10% considered average?
How do you think about rollover changes when you have smaller centers?
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