Demographics and Barriers to Entry Are Investor Secret Sauce

MARINA, CA—The retail tide has turned in many areas that rely on barriers to entry and strong demographics. A local power center, The Dunes, is an example of that.

The Dunes is fully leased to national and regional credit tenants including Best Buy, Old Navy, Kohl’s, Bed Bath & Beyond, Michaels, Party City and REI, among others. The Monterey Bay property was recently sold for $45 million to a Southern California-based private investor which purchased the property as an addition to its portfolio.

CBRE retail experts Kirk Brummer, Megan Wood, James Tyrrell, Jimmy Slusher, executive vice president Philip Voorhees and senior vice president Preston Fetrow represented the seller, Shea Properties, an Orange County, CA-based fully diversified real estate company. The buyer was represented by a cooperating broker.

“We commenced marketing at the end of 2017, in a market that was reacting to all the media negativity about retail closings and had consequently discounted power centers. The retail tide turned in 2017, and despite bankruptcies by Sears, Toys R Us and Aaron Brothers, our marketing efforts procured eight offers with strong competitive bidding. Both the buyer and seller achieved an excellent result at the closing,” said Fetrow.

According to Tyrrell, CBRE’s marketing efforts produced more than 460 confidentiality agreements/offering memoranda. Through the team’s managed bid offer process, eight offers were generated to purchase the property. The purchase price exceeded CBRE’s pricing guidance to the ownership.

“Through our team’s broad marketing approach, we reach the greater investment community globally, including cooperating brokers with unique relationships to family-owned corporations and high net-worth foreign investors, who we otherwise would not have reached through traditional listing services,” Fetrow noted.

The Dunes is located on 19.3 acres at 101-145 General Stilwell Dr., built in 2007. The 233,892-square-foot center is situated along Pacific Coast Highway, which serves as one of the main arterials for the trade area.

“Cap rates on better quality power centers seem to be contracting after moving very wide in 2018,” said Voorhees. “High image institutional-quality centers in coastal markets like The Dunes make great sense in terms of leveraged yield, with a cap rate to 10-Year treasury yield spread of more than 400 basis points. A portfolio of similar assets would produce tremendous leveraged cash-on-cash returns.”

Fetrow says without question, strong demographics and barriers to entry are some of the key ingredients that investors seek in these markets. Consequently, quality retail centers possessing a significant degree of credit tenancy with strong tenant sales are able to push cap rates into the 4.50% to 5.25% range.

“Due to the significant time, cost and difficulty associated with developing high-quality retail centers in many coastal markets, lenders and investors alike will generally be highly aggressive to obtain control of an asset in markets with strong demographics that have political and physical supply constraints,” Fetrow tells GlobeSt.com. “Additionally, lenders will reduce interest rate spreads to be competitive for assets of this type. Due to the extreme lack of retail product meeting these criteria, we foresee this trend to continue for the long term. Many of these characteristics resonated with The Dunes, resulting in an excellent leveraged return for the buyer.”