How to 'value' a 50% vacant retail center

Question

HelloI am researching into 50% vacant retail center in a mall. It is listed for 2.5 million and 9000 sqft. However, it is 50% vacant with current rents around 150,000 paid by 3 tenants. 3 more spaces are vacant.How can I arrive at a fair market value for this property? What are the due diligence measures to take before buying this property.I am novice investor but hoping to rent it fully in a year or so and sell it for profit. Seeking for some advice with investment guru here.Thank you.

Sunitha Alli · Answer

@Ash PatelThis deal never materialized. The seller changed his mind to find a tenant himself and then sell. Too good to be true I guess.

Joel Owens · Answer

When you buy value add make sure the existing cap rate is high like 8 or more on current income.Seller that have had troubled properties like to sell 6 cap on existing and then PUFF the upside that it will be easy and will go perfectly with no issues to stabilize. It is not this way or the seller would have done it themselves......... : )They tend to underestimate income down time, leasing commission costs, and tenant improvement credits along with inflated expectations with rent rate lease up per sq ft.T-mobile tends to pay above market rents so make sure it is not way above just some. Example market rent is 18 a foot and other 2 tenants pay 17 but T-Mobile pays 21. Spread of 4 a foot is okay if they have an end cap unit facing the road which tends to go for more money in a center. If there rent is back from 2008 for the down turn and they are paying 30 you have a problem. You need to then discount that income to current market rates because there is a strong chance T-mobile will renegotiate the rent when the option comes and you will have a cap rate drop.

John McKee · Answer

I know this is an old post but I will respond anyway as I am looking for similar deals. The most important part of research would be to look at the competition. If there other similar spaces nearby that are having several vacancies then that’s a warning that something is wrong with the local economy. There are many towns in the United States that are stagnate or declining. Biggest resource to find out what’s going on is to visit your local chamber of commerce.

Ash Patel · Answer

@Sunitha Alli - Does the property break even today? If not, how far from break even is it? Are there a lot of vacancies close by or is this property an anomaly? I am assuming this is a class b- area? What is your experience with CRE? Do you plan on managing the property yourself?

Account Closed · Answer

Give Brad Thomas a call. He is an expert in retail malls. His FEE I would surmise is quite high. Google him-he knows his stuff.One must wonder why others havent scooped up your deal.

Jason Hirko · Answer

@Sunitha Alli depending on how nice this shopping center is, I would expect that to be part of the brokerage package in exchange for them getting the listing. However, without a history with them or some connections, they likely wouldn't do it for you as part of DD. Maybe I'm wrong though?

Jason Hirko · Answer

@Sunitha Alli Costar is the easiest (and most expensive) way. If you are using a broker, they should be able to pull this information for you in about 2 minutes. If not, look at everything else on the market - they will generally show rents and NOI. In order to figure out how hard it will be to lease out the rest of it, you really need a commercial broker or someone who knows the commercial space well in your area.

Jason Hirko · Answer

@Sunitha Alli What are the cap rates of fully leased comparable properties selling at in your area? Presumably you would be able to double your rents by doubling your leased space? So on a NNN basis, you could turn it into a 12 cap. that's good in any market. But are the leases triple net? Who are the tenants? Regional credit or local tenants? Personal guarantees? Length of time left on all these leases? Your plan is predicated on selling this to a net lease investor presumably since you want to lease it out and flip it, so these are just a few of the questions they will be asking to determine a reasonable cap rate, so those are the questions you should be asking now too.

Sunitha Alli · Answer

@Cheechee Lee Good point. My agent approached me with this deal asking if I am interested. If not he will move onto others. This property is not in market yet.I am not sure how to trust the deals that do not come to market. Are there any due diligence points for property that do not get into market?

Sunitha Alli · Answer

@ Joel Owens That makes perfect sense. Thank yo so much for the key points, very helpful!