Commercial retail investment in Tucson, AZ. Thoughts?

Question

Hi all,

I am looking for advice from anyone who has either invested in Tucson or knows the market there. I am considering investing in commercial retail closer to the Air Force base area in south, south east part of Tucson. How have Tucson investments worked for you? How is the market there? Would it be wise. Also appreciate if you can share contact of a trusted local lender in the area. Thank you!

Joel Owens · Answer

Priya if you do not know what you are doing you can lose A TON of money. Retail centers are more work than single tenant typically.

There is property risk, tenant risk, and landlord risk. Landlord risk if you make 500k a year buying a 2 million center then might be able to OUTEARN your mistakes. If you make 100k a year and had some equity gains with 1031 and now buying a center with a big portion of your net worth buying the wrong one can be catastrophic and take a long time digging out of that hole to get back on track.

I have been doing commercial real estate about 2 decades and have reviewed about 1 million properties. I review thousands a week for myself to buy and my clients also. After you do it so long it's like breathing air it is just natural and comfortable to you. What is the price of the center and what is your approximate net worth and annual income? How many tenants in the center?

Scott E. · Answer

I can't top Joel's response. I have no experience in retail. When it comes to commercial, I've only invested in medical condo units.

What I can comment on though, is Tucson, AZ. I was there 2 weekends ago for the Gem & Mineral show. I shopped some commercial deals while I was out there, and was generally very disappointed. There were some decent pockets of town but they were few and far between. I found the area in general to be pretty rough and poorly maintained. Before heading back to Phoenix, my truck was keyed in the parking lot of a convention center.

Only sharing all of this to say... be careful out there. This is my personal experience over just 1 short weekend in Tucson. But that experience was pretty bad. I wouldn't feel comfortable investing out there anytime soon.

Cade Olof · Answer

Hello @Priya Shekhar, I have no experience investing in commercial near the AF base however I have just recently met with some commercial lenders in the area. Feel free to send me a PM so I can send you their contact info :)

Priya Shekhar · Answer

Thank you so much Joel for taking the time to offer your informed insights. Sorry couldn’t get back earlier. Whatever you said makes total sense, however I have to say on the question of investing in a STNL, we have had a bad experience in the past so we decided that we will only invest in STNL’s  if it’s a long lease with corporate guarantee. To cut the long story short, our franchisee tenant filed for bankruptcy within a couple of months of our buying the STNL single tenant property. With the multiunit retail center while we definitely understand that there’s more management involved however at least all our eggs are not in the same basket, so to speak and even if couple of tenants would leave it would still be sustainable.

I am thinking of creating a new post for this question but putting it here too.. please can you answer if a great VPD (vehicles per day) in a not so big city is better than a not so good VPD in a big city?

Joel Owens · Answer

Priya the listing brokers job is to SELL YOU on behalf of the seller the property you are inquiring about. They get continual business from the seller and that is THEIR client so you have to take anything they say with a grain of salt.

The buyers broker is on the buyers side. Their goal is to try and see any issues with the property and viability of the investment and that tends to come with experience and years in the business doing many transactions over time.

Even if the area has full tenants and centers it might be the dying part of town with weak tenants and not the growing side. The area might have high population but low income levels with high crime and older buildings with no money to fix up the areas.

It's really all about your goals. I am not buying a 5 cap to 6 cap retail center dealing with 10 tenants for 6 million when I can get a credit STNL tenant for same cap rate with rental increases and do nothing and get almost the same returns or maybe even better because tenant is investment grade. A 5 to 6 cap could make sense if rents were half below market and future cap was much higher. You have to look at tenant mix in the center and when leases are coming due. You have to see which tenants occupy the most space going down to the least space and their credit quality if any and type of business.

There are just so many variables at play. Co-tenant anchor clauses, restricted uses in the lease, cumulative or non-cumulative caps, controllable and non-controllable expenses, aged receivables, any CC and R's for current and special assessments, when was roof and parking lot last completed, when are property taxes reassessed, early termination lease language, business buyout of existing tenant ( example 300 unit Subway operator on lease sells to 2 unit franchisee and guarantee goes away. You go from strong guarantee to almost worthless ). In that instance would want lease language that says credit of replacement operator or net worth has to be XX or lease guarantee remains from previous business owner.

Just tons and tons of stuff to look at with retail centers. People get sucked in looking at higher cap rates but clueless on how to analyze. High cap is theoretical if the tenants go dark.

John McKee · Answer

You really need to contact a local broker. They should tell you about the trends and leasability of the area.  Look at other shopping centers in the area. Are they fully leased?  If not this could be a potential red flag.

Priya Shekhar · Answer

Thank you Joel. The retail center is in low 6 Mil.It is definitely a bigger investment for us so if all the units were to become vacant, we wouldn’t be able to make the loan payments.  Can you please share that in your experience,  what indicators can project continued success of a commercial retail property. Is there a matrix you use to rate the buyability of such properties. Appreciate your inputs.

Deonte Brown · Answer

Hi @Priya Shekhar! It's hard to answer your question with the information that you have provided. The investment needs to be analyzed on a number of factors such as retail stores in the investment, anchor stores traffic patterns in the area, etc. Feel free to send me a private message if you'd like to discuss this further. I can connect you with several resources that can take your project to the finish line.

Commercial retail investment in Tucson, AZ. Thoughts?

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