Retail Real Estate has seen significant changes in the past decade. So how are firms handling the headwinds in the Retail Market?
The team at Rockval interviews Eitan Holder, the Director of Acquisitions at ME Real Estate. ME is a Columbus, Ohio-based Full-Service Commercial Real Estate Firm with $300M in assets under management. The firm initially spread its roots in single and multifamily projects. It was primarily acquiring residential assets in upstate New York and Ohio.
Holder explains that the firm pivoted in 2020 when it began to acquire grocery-anchored shopping centers. The pivot was primarily due to the cap rate compression in Multifamily. During this time, the firm’s growing reputation and track record attracted more significant investors, pushing them to continue acquiring investments. The high demand for institutional capital in the multifamily sector opened up opportunities in other asset types, such as retail. It was a less competitive arena, and ME recognized the potential for higher returns. ME followed Warren Buffet’s famous quote, “be fearful when everyone is greedy and greedy when everyone is fearful.”
ME Real Estate seeks grocery-anchored centers in markets with increasing population, job growth, and household income. One of the most important key metrics is the anchor’s gross revenue sales. Holder’s general rule is ~$500/SF in sales, but you should consider accessibility, visibility, and a solid presence of national tenants. At least 35% of the occupancy should be a nationally recognized brand. ME Real Estate also utilizes geolocation data. Analyzing cell phone GPS data is a game changer for retail investors. You can have a center positioned on a highly trafficked road with over 30,000 passing vehicles per day, but knowing how many people visit the center accurately indicates a great location. Strong tenant sales are always a good indication of high foot traffic.
We asked Holder his opinion on the famous phrase “retail is dead.” Holder says in the long run, most big box retailers will continue to shrink their retail footprint and adapt to a more industrial/retail hybrid. But successful real estate investing requires one to think outside of the box.
ME Real Estate is keen on buying centers with Bed Bath and Beyond and other big box stores closing locations. Assuming the big box tenant will not renew their lease upon expiration of the lease, Holder considers that when underwriting and making an offer. The firm has grown a relationship with national tenants, which gives them the confidence to fill any vacancy, whether a small or a big box space. Dividing the space into multiple bays is also an option.
When asked about the future of retail, Holder suggests profitable retail investments will require redeveloping. He predicts a new type of tenant will emerge. Stating, “The similarity between Retail and Industrial assets will become closer and closer.” Over the past decade, we have all witnessed the rise of e-commerce and food delivery. National brands are racing to speed up delivery times. Holder speculates retail properties are transitioning into fulfillment centers. Tenants will desire smaller common areas and more of a warehouse-type space to fulfill food and consumer product delivery orders. Retail centers are usually in closer proximity to the consumer as opposed to industrial space.
Holder also mentions some retail properties are being partially converted into self-storage facilities. The high cost of housing has pushed the demand for self-storage ever higher. In addition, higher living costs have forced homeowners into smaller households. In theory, retail centers and malls are conveniently located, providing easy accessibility to the consumer. The only drawback is strict zoning requirements, but there is an opportunity. Additionally, electric vehicles play an important role in retail investment. Electric vehicle sales have been climbing steadily, yet the number of public charging stations is still deficient. It is a near-term opportunity to increase foot traffic by adding charging stations. Whole Foods has already begun to install charging stations. About 20% of their locations are now EV friendly.
The opportunity for successful investment in retail is there. Asset classes are constantly shifting. The ones who can reposition and execute will reap the benefits. Holder said, “those who don’t adapt will end up like Blockbuster.”
ME Real Estate is always looking for acquisitions in any asset class or market. Reach out to Eitan directly via LinkedIn.
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