Large Strip malls pros/cons

[Ash Patel]

I've been researching Strip malls that range from $2.5mm to $4mm.  Under 10 years old, good traffic counts and in growing areas.  In this range, the name of the game seems to be get it 100% leased then sell for an 8.5 cap.  

I construe this as a pretty high risk investment.  If a tenant leaves or rates rise, what little profits you have are wiped out.  I know while things are good, the tenants are paying down a large mortgage and there can be a light at the end of the tunnel.  Below are two examples of Cincinnati Strip malls:  Give me your thoughts on strip centers.  Would you spend your money on investments like this at 8.5 caps?  Thank you all!

$2.6 Million

$4 Million

[Joel Owens]

Usually on these with 25% down breakeven occupancy is at about 62%. So you have to lose about say 4 tenants out of 10 in a strip center to start taking money out of your pocket.

You have to analyze are the leases staggered so they are not coming all due at the same time. Also traffic count on the road doesn't matter if there is a median and most of the traffic is blocked from getting there. Good sightlines are important as well as the mix between national and mom and pop tenants. Knowing you do not have vintage leases above market fixing to roll down and be renegotiated or the tenant leaves to a cheaper per sq ft base rent center in a similar quality of location.

If you have 20,000 sq ft for instance with 10 tenants a balance of smaller spaces is better. You wouldn't want a junior box of 6,000 to 10,000 sq ft because if they go out as a mini-anchor you are negative cash flowing. If you do have a large tenant you have to underwrite them very hard. If a national tenant with parent corp guarantee there is greater security. If it is a franchisee then you need to get sales for that location. Compare that to the national average for the concept and see if above average, average, or below average for the location. Restaurant you do not want at more than 10% annual gross sales to rent ratio. If you see sales are suffering and ratio Is high then tenant renegotiation on the lease is in your future for loss of cash flow with the write down. The smaller tenants around 1,000 to 2,500 sq ft can release in a few months. The junior to large box can take 6 months to 1 year even for a good location before they start paying on the lease. Even if a forward commitment is signed the TI and rent credits have to be negotiated and interior build out and CO has to be issued before the tenant will want to start paying rent.

Many other things to consider. I love retail strips. You just have to completely understand them and how to underwrite to hedge proper risk just like any other asset class. I have multifamily owners who call me wanting retail and they only know 2 to 3 things for reviewing a retail center whereas I have a very long list.