Shopping Center investments have a certain amount of risk. It is imperitive to be able to analyze the critical aspects of a shopping center such as, current income vs current debt, know lease start/end dates, know if current rents are above or below market, and vacancy rate in the market. These are just a few examples of the types of figures that need to be analyzed when evaluating a shopping center for acquisition. But with this post I want to get beyond the numbers. What are some other important variables to take into consideration during a shopping center acquisition?
Location - It is one of the oldest yet truest phrases used in real estate. Location, Location, Location.
Access- How easy will it be for customers to reach your tenants. Is the property at a signalized intersection? If it is not, what is the speed limit on the road in front of the property? Will customers be able to turn right and left from the road to reach the shopping center?
Competition - It is important to know the competing centers in the area, who are the major tenants, what are their lease rates, how well is the property managed or maintained, and even how long has the property been owned by current owner.
Credit - How many tenants in the shopping center are credit tenants? National and publically held tenants theoretically are less risky than regional or mom and pop tenants. How will the current tenants weather a bad economy? It is a necessary question in light of the last three years.
These are just a few factors beyond the numbers to take into consideration when analyzing a potential shopping center acquisition. A knowlegeable and seasoned broker with experience in shopping center acquisitions and dispositions is an outstanding asset for buyers looking to acquire shopping centers. They should be able to help buyers with these factors as well as encyclopedic market knowledge to help paint a clear picture of the asset.
Again, my intention with this post is to highlight just a few factors beyond the numbers that should be considered while analyzing a shopping center for acquisition. I have given just a few examples(and did not expand fully on those), this is not a how to guide, but merely an avenue to highlight other variables of a shopping center with regards to analysis. If you have any questions please feel free to let me know.
Saturday, May 14, 2011
Sunday, February 27, 2011
Advertising based on a pro forma cap rate
It has been a while since my last blog. But this morning I started thinking about how things have changed in the real estate investment community. And as I was thinking, a question popped into my head. Does it make sense to market a shopping center based on a pro forma cap rate?
A pro forma cap rate is based on the possible future income to a shopping center, either through lease up of vacant shop space, a pre negotiated rent increase, or an increase of rent during an exercised option period. Of the three possibilities mentioned, the only one that provides any real value is the pre negotiated rent increase. There are too many variables that come into play to count on a tenant to exercise their option or to find a new tenant for a vacant space.
In today's economy, buyers are analyzing shopping centers based on actual income. Lending institutions are underwriting shopping centers based on actual income. Tenant options are important, and to some buyers the ability to add value through lease up is important. But if the actual present income can't support the debt, any future potential income is pointless.
I believe it is important to include potential income in the marketing material for a shopping center, but I believe it is a waste of the sellers time and potential buyers time to promote the sale of a shopping center based on a pro forma cap rate. In todays market, the pro forma cap rate is a great tool for showing the long term income potential and providing some insight to the current asking cap rate based on actual income.
A pro forma cap rate is based on the possible future income to a shopping center, either through lease up of vacant shop space, a pre negotiated rent increase, or an increase of rent during an exercised option period. Of the three possibilities mentioned, the only one that provides any real value is the pre negotiated rent increase. There are too many variables that come into play to count on a tenant to exercise their option or to find a new tenant for a vacant space.
In today's economy, buyers are analyzing shopping centers based on actual income. Lending institutions are underwriting shopping centers based on actual income. Tenant options are important, and to some buyers the ability to add value through lease up is important. But if the actual present income can't support the debt, any future potential income is pointless.
I believe it is important to include potential income in the marketing material for a shopping center, but I believe it is a waste of the sellers time and potential buyers time to promote the sale of a shopping center based on a pro forma cap rate. In todays market, the pro forma cap rate is a great tool for showing the long term income potential and providing some insight to the current asking cap rate based on actual income.
Monday, August 2, 2010
So where are we now - Insight to the current retail investment market
As I sit down to write the first post on the new blog with any real substance to it, it is important for us to asses the current situation of the market with which we are working in.
Now there is no shortage of data that points one way or the other about the health and stability of the market. All I can offer is what I am seeing on the ground. Activity is up from a year ago but no where close to where it was in 2007. The fly by night buyers are no longer around having been wiped out by the economic downturn. Now, the buyers tend to be more sophisticated and specific. Grocery anchored centers have typically been the goal for small to mid sized corporate investors but I am also seeing some transaction volume with well tenanted shadow centers.
Sellers are starting to come around. The hardest part of being a broker in 2009 was convincing sellers that the market had changed and therefore the value of their property had changed. Now sellers have realized that if they are going to sell their shopping center it has to be priced correctly. Since transactions are down there are a limited amount of comparable sales that will help with pricing. But a good way to ensure accurate pricing is by looking at the current competition. By analyzing comparable properties that are currently on the market you can better evaluate where the property needs to be priced.
The national retailers are out there looking for space. It is a good sign that the national retailers are signing leases. That is the good news. The bad news is that the price per square foot is down and the tenant improvements are up. Shopping Center owners are paying a lot more this year to get those vacancies filled. Short term sacrifice for long term gain is the prevailing thought for shopping center owners. Bringing in a national tenant with a good term will dramatically enhance the marketability of a shopping center and also bring value when it comes to price. A buyer will pay more for a center that has national tenants with corporate leases than a center mom and pop tenants with just one location.
What the current market boils down to is risk. Buyers are looking to reduce the amount of risk in an investment. The more you can reduce the risk in your shopping center the more valuable it will be in the current market. If you have tenants whose term is expiring this year or next try getting them to excercise their option early. I have even seen some owners offer a discount for tenants renewing early. What it does is provide stability for the center as well as help out the tenant.
What I have presented are some extremely general opinions on the current condition of the market. These opinions are based on what I am seeing and hearing from owners and retailers in the East Tennessee market. Each property is different and each situation is different.
I would really like to hear your feedback. What are you seeing in your market?
Now there is no shortage of data that points one way or the other about the health and stability of the market. All I can offer is what I am seeing on the ground. Activity is up from a year ago but no where close to where it was in 2007. The fly by night buyers are no longer around having been wiped out by the economic downturn. Now, the buyers tend to be more sophisticated and specific. Grocery anchored centers have typically been the goal for small to mid sized corporate investors but I am also seeing some transaction volume with well tenanted shadow centers.
Sellers are starting to come around. The hardest part of being a broker in 2009 was convincing sellers that the market had changed and therefore the value of their property had changed. Now sellers have realized that if they are going to sell their shopping center it has to be priced correctly. Since transactions are down there are a limited amount of comparable sales that will help with pricing. But a good way to ensure accurate pricing is by looking at the current competition. By analyzing comparable properties that are currently on the market you can better evaluate where the property needs to be priced.
The national retailers are out there looking for space. It is a good sign that the national retailers are signing leases. That is the good news. The bad news is that the price per square foot is down and the tenant improvements are up. Shopping Center owners are paying a lot more this year to get those vacancies filled. Short term sacrifice for long term gain is the prevailing thought for shopping center owners. Bringing in a national tenant with a good term will dramatically enhance the marketability of a shopping center and also bring value when it comes to price. A buyer will pay more for a center that has national tenants with corporate leases than a center mom and pop tenants with just one location.
What the current market boils down to is risk. Buyers are looking to reduce the amount of risk in an investment. The more you can reduce the risk in your shopping center the more valuable it will be in the current market. If you have tenants whose term is expiring this year or next try getting them to excercise their option early. I have even seen some owners offer a discount for tenants renewing early. What it does is provide stability for the center as well as help out the tenant.
What I have presented are some extremely general opinions on the current condition of the market. These opinions are based on what I am seeing and hearing from owners and retailers in the East Tennessee market. Each property is different and each situation is different.
I would really like to hear your feedback. What are you seeing in your market?
Sunday, May 30, 2010
We have started a blog!
We have decided to start a blog. We hope to provide an in depth look at shopping center investments from the stand point of both buyers and sellers. We will provide as much information we can on many topics that relate to buying, selling, and owning shopping center investments. It is our goal to keep you informed on the national and regional trends with regards to the market place.
It has been extremely volatile in the commercial real estate industry, which has yielded many conflicting reports on the current and future health of the shopping center investment industry. We hope to sift through that information and give you a clear interpretation that will allow you to make your own judgement on the well being of the market.
It has been extremely volatile in the commercial real estate industry, which has yielded many conflicting reports on the current and future health of the shopping center investment industry. We hope to sift through that information and give you a clear interpretation that will allow you to make your own judgement on the well being of the market.
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