Expert: Economics of Retail Look Strong
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Part 1 of 2
IRVINE, CA-The tide is once again shifting and the economics of retail are looking strong. With that in mind, retail is the most logical place to seek new opportunities in today’s market. So says Passco Cos.’ CEO Bill Passo, who recently chatted with GlobeSt.com on the subject. “Retail is a good product type in which to invest right now… the strongest investments in today’s market are actually shopping centers that are not fully stabilized” he says.
GlobeSt.com: Passco Cos. has been active in the acquisition, development and management of commercial properties throughout the U.S. for more than 15 years. Where are the new opportunities in today’s market?
Bill Passo:Today’s commercial real estate market is still somewhat in flux, as we continue to recuperate from this most recent recession, but new opportunities are emerging throughout the US. The primary opportunity we’re seeing at Passco is a return to retail investment.
This assessment is based on a long history in the industry, through which I have personally experienced six recessions. We are now in what I hope is the sixth recovery, and I’m examining today’s opportunities in relation to what has happened in past cycles.
For example, in 2004, I felt strongly that another recession was imminent. Drawing upon my experience in past recessions, I knew that office and retail would be hit hardest, and would be the slowest to recover.
With that in mind, Passco as a company began to focus on multifamily, and from 2005 to 2011 we acquired and/or managed over 6 million square feet and over 13,000 units of well-performing multifamily assets.
Today, I recognize that the tide is once again shifting, and that the economics of retail are looking strong. With that in mind, retail is the most logical place to seek new opportunities in today’s market.
GlobeSt.com: Why did Passco Cos. decide to start acquiring retail properties again in 2011? Do you have a specific focus?
Passo:Drawing upon our knowledge of past cycles and our projections of what will happen in multifamily over the next two to three years, we made the decision to return to retain investment in 2011. We continue to acquire multifamily, and continue to believe it is a strong, safe product type which delivers a steady return. With that said, we also recognize that the opportunity for increased cash flow is higher in retail than it is in multifamily at the moment.
Demand for retail space is increasing, and there will be an opportunity for rent growth over the next couple of years. At the same time, multifamily rents will likely flatten as supply begins to meet demand.
Cap rates, too, are looking stronger in retail than multifamily, and that trend is likely to continue for the next few years.
For these reasons, we anticipate that retail is a good product type in which to invest right now.
At Passco, we are focused on acquiring convenience shopping centers, and we look for a strong tenant mix that encompasses various services, including beauty, service and food service. These services are not threatened by internet sales, and are always in demand from consumers. Thus, these types of retail investments provide steady cash flow and an opportunity to sustain and add value over time.
GlobeSt.com: I know that you have an active investment services team that helps investors and broker-dealers to identify and manage specific investment opportunities in the national commercial real estate market. What types of retail properties make the best investments in today’s market?
Passo:When selecting the best investments in the current market, it’s essential to first determine the appetite and end goal of the investor or investors you are serving. Investors tend to lean toward one of two opportunity types: value-add vs. cash flow.
We’ve all heard the stories of (and perhaps been fortunate enough to take part in) the acquisition of properties at extremely low prices that can be flipped for an incredible profit.
While we continue to keep our eyes open for those golden opportunities, it’s important to realize that most of the time, the best investments are also the realistic investments.
At Passco, we have found that cash flow investments are sound, strong and repeatable. Through these investments, we offer the individual and institutional investors with which we work an opportunity for a steady return on their investment.
With regard to retail, the strongest investments in today’s market are actually shopping centers that are not fully stabilized. By acquiring a center with roughly 10% to 20% vacancy, a buyer has the opportunity to lease the remaining space, while steadily raising rents to accommodate the improving market, ultimately achieving a strong and steady cash flow.
GlobeSt.com: Along those same lines, are there specific investment opportunities that Passco Companies is currently providing to investors in the retail sector of the market?
Passo: We present our products in two ways: we can either structure suitable deals to help our investors obtain a 1031 exchange, using either a Delaware Statutory Trust or a Tenant in Common Structure, or we utilize a LLC to accommodate investors not focused on 1031, but wanting income and diversification.
While TICs were very popular and successful for many years, lenders have now become wary of lending to a group of borrowers. Today’s lenders prefer a single entity borrower which can be a DST or LLC. However some lenders have expressed a willingness to consider a smaller number of TIC’s in retail properties.
The Passco Income Fund II was created to provide the opportunity for investors to take part in a program combining retail property ownership and bridge financing to target an 8.5% current return.
This fund will focus on acquiring 10,000 - 25,000 square-foot shopping centers in highly desirable and high traffic locations. The Fund targets product with stabilized, quality tenants that are internet resistant, including beauty, food, health and service retailers.
Financing on each property has been generally structured with 10-year fixed financing with five-year interest only.
Check back for part 2 of this Q&A, where Passo talks about the competition, mom and pop operations, and why he currently lacks confidence in the consumer.
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