A Return to Fundamentals
- Jul 18, 2018
At mid-year, we find ourselves in a shifting environment. The market is demanding a return to old-school fundamentals. This includes closer attention to location, quality of the real estate and a solid analysis of the surrounding retail corridor, including anything that can impact the future success of a property and its surrounding access, as well as its current and future customer base.
Buyer attitudes are part of the change. Today’s buyers want more of a deal and are willing to take on a little more risk for higher cap rates. Looking back, this has been a real shift in attitude. Over the last few years, buyers were not as concerned about years remaining on the lease and the credit of tenant. Rather, they were focused on the investment, which meant that fundamental real estate values were overlooked.
Investors are looking more closely at the deal. With contractions of existing brands and new emerging concepts making daily headlines, retail volatility is now an expectation. This means that investors have to challenge each deal and determine if they have an option if the tenant fails and are left with a dark building. Brand names that historically pay top-market rents have become a gamble. A high-profile brand that might have had some cache in previous cycles is now a concern because the investor is gambling on the durability of that income stream. If that tenant leaves, it can be a near-impossible task to find a new retailer who can take on a 900-square-foot building and pay approximately $50 per square foot in rent.
There is a greater focus on alternative options. The investment analysis must take into account that a new use may not be retail. There are a number of new options that fit neighborhood demographics, including medical office and urgent care clinics. These tenants are strong and remain in demand. In many cases, the medical tenant can be a more cost-effective way to backfill an older building and repurpose a portion of an existing neighborhood retail center.
Franchises remain hot. Amazon’s resilient concepts will continue to succeed. This is especially true for quick-service restaurants and fast food. For this reason, investors who, a few years ago might not have risked or gambled on a franchisee, will now re-evaluate that risk and take on a franchise model to get a better deal.