'Bigger Is Better' Disappears in Retail

IRVINE, CA-Remember Biggie Fries at Wendy's? Supersized fast food options were just one example of America's obsession with all things big. Bigger, it seemed, was always better.

Today, the “bigger is better” mentality is all but gone in the retail real estate market.  

Retailers have abandoned the big-box concept, and are increasingly seeking smaller spaces in which to do business. Even smaller retail tenants and restaurants are now being cautious not to take larger spaces than are absolutely essential.

What does this mean to real estate investors? Naturally, it means a new opportunity.

At Passco Cos., we specialize in the acquisition of multi-tenant retail product throughout the US.  The new opportunity we've identified is that bigger is not always better when it comes to market size, either. 

While many investors are focused only on traditional primary markets, at Passco Cos., we are now seeking investment opportunities in secondary and tertiary markets. There has been substantial cap rate compression in the gateway cities and, by setting our sights on the acquisition of shopping centers in secondary and tertiary markets, we've been able to achieve higher yields than those attainable in primary markets.

While location remains a key driver in the success of any real estate endeavor, the synergy of tenants in a regional shopping center is also paramount to its long term profitability. 

For example, Passco acquired three shopping centers in 2012, each in secondary markets, including Lancaster, California; Albuquerque, New Mexico; and Kansas City, Missouri.

In each instance, we carefully selected the center based on existing tenants. Our focus is internet-resistant retailers, including service, beauty and restaurant tenants. Consumers are always in need of these services, and by keeping this category of tenants in place, we are better able to ensure the stability of our centers over time.

In addition, each shopping center we acquired in 2012 is shadow-anchored by a nearby large tenant. By selecting these investments, we achieve the benefit of a large, nearby anchor that generates traffic. However, we are not saddled with the low rent-per-square-foot which can accompany a large anchor tenant, ultimately dragging down yields.

By acquiring centers in smaller markets, near large anchors, and with internet-resistant tenants, we remain able to acquire properties at competitive prices, then build value over time.  In this way, the demise of the “bigger is better” mentality is actually good news for retail investors. 

Overall, retail is going to improve. The consumer will continue to spend more as the economy continues to recover, and incomes rise. From there, sales will pick up, rents will go up, and tenants will expand.  Smart investors who can secure product in the right markets with the right tenant mix now will benefit from strong returns over the next five to 10 years.

Gary Goodman is a SVP at Passco Cos. in Irvine, CA, heading up the firm's retail and multifamily acquisitions. Contact him at ggoodman@passco.net. The views expressed in this column are the author's own.