Investors in the retail sector are taking a closer look at how they deploy their capital thanks to record-high construction costs and shifting markets.. For retail owners and investors, this environment has created both constraints and opportunities, particularly as limited new supply meets sustained tenant demand.
“We’re in an environment where construction costs remain high, perhaps not as high as they once were, but still elevated by historical standards,” says Jason Kessler, president and CIO of ARCTRUST. “Buyers are very focused on the basis and the land’s intrinsic value when evaluating new properties.”
He notes retail assets are seeing especially strong competition. Because new construction remains costly, there is high demand for existing properties with solid fundamentals and strong tenants, resulting in properties receiving multiple offers. Understanding how to approach buy-versus-build opportunities to carefully weigh long-term fundamentals can benefit investors.
Downside Analysis is a Critical Part of the Approach
When evaluating whether to buy or build a property, Chris LeCates, Chief Growth Officer at ARCTRUST, says the team often begins with a downside analysis considering basis, tenant strength and market fundamentals.
“We have many options during that evaluation,” says LeCates. “We can put a tenant in the building, knock it down and build something new or go vertical in certain situations. We start every acquisition by understanding what our opportunities would be if we were holding that property vacant.”
He explains that the analysis becomes clear when they find a property with a low enough basis and strong intrinsic land value. He also highlights the importance of markets where demographics clearly support another tenant.
“We don’t usually go into tertiary markets. We focus primarily on tier-1 and tier-2 markets with higher incomes,” says LeCates.
Kessler further explains the real estate itself always remains the core consideration, adding, “Our approach is to focus on the dirt, the demographics, the ingress and egress, and the downside scenario.”
“Demand is overwhelming supply right now,” says Kessler, pointing to the strength of retailers seeking high-quality sites in established markets. “When something becomes vacant, you’re getting two, three, four LOIs for that same property.”
Consistent Fundamentals Anchor Long-Term Strategy
Looking ahead at the retail sector, LeCates notes that he continues to see strong demand. He notes limited new development and steady tenant expansion are driving competition for quality sites.
ARCTRUST’s versatility in development is also not limited to retail product types.Through the MORE Program, ARCTRUST offers Money, Opportunity, Resources, and Expertise, to support the capital needs of Sponsors and Developers who are building multifamily, self-storage, retail, and industrial assets.
Regardless of the product type, ARCTRUST remains grounded in the same principles that have guided it for four decades. Both Kessler and LeCates note that ARCTRUST, after 40 years in business, operates with the philosophy that, while market cycles will present variable opportunities, the key is a consistent long-term approach.
“We don’t change our goalposts based on what’s happening in the market,” says LeCates. “The market will vacillate between our various strategies, so at times we’re buying and at others we’re building, but the underlying investment thesis stays the same.”
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