When Losing Anchor Retailers Is Good

What happens when the two anchor retailers at your 150,000-square-foot shopping center both decide to move locations and let their stores go dark? If you’re Sterling Organization, you jump on that deal immediately. What may be seen as widespread disruption, indeed a revolution in shopping trends, for retailers, is also presenting clear value-added opportunities for some U.S. real estate operators and managers. For Sterling, that was precisely the case in acquiring the Roswell Village Shopping Center in Roswell, GA.

Purchased out of special servicing for $10.6M in October 2014, the grocery-anchored retail specialist was faced with an occupancy rate of just 31 percent after the two key anchors, Publix grocers and Rite Aid Pharmacy, ended their occupancy at the site. However, despite allowing their stores to “go dark”, as Sterling principal and chief marketing officer Adam Munder says, the two firms were still paying their rent meaning the economic occupancy of the site – the cash flow from rental income – was at 65 percent. What helps even more is that typical anchor tenants in Class B centers, such as Roswell Village, are paying below-market rents. “If a big-box retailer goes dark at $6 per square-foot and we know, with improvements, the market can afford $14 per square-foot, we’ll take that deal every day,” says Munder. “That insulates us from a lot of the risks you see when you’re buying retail assets today and gives us cash flow and time to decide how we want to reposition the center and backfill the space. The strategy is to take some risks where others won’t.” In a sector that saw 2014 sales volume surpass its 2007 peak, annual price increases of around 5.3 percent and cap rates hitting post-crisis lows of 6.7 percent, according to data provider Real Capital Analytics, Munder accepts there are huge challenges facing retail investors and managers today. “There’s a lot of competition, particularly with grocery-anchored centers in marketed deals,” says Munder. “It is imperative that we stay disciplined. We cannot change our underwriting based on what the market is doing or deal flow. For us, that means we’re looking for complicated grocery-anchored deals, Class B malls and centers that need work and repositioning. Most are typically off-market deals that, in some cases, require smaller equity checks.” One such recent deal was the $58.8M acquisition of Golf Mill Shopping Center in Niles, IL. The 1.1-million-square-foot mall, which houses retailers such as Target, JC Penney, Kohls and Sears and of which Sterling owns 886,000-square-feet, will see 86 percent of its leases roll by the end of 2016. For Sterling, though, the deal centers on the lack of improvements made by the previous owner. Sterling’s plan involves creating numerous out parcels of retail space, single-property pads usually housing restaurants, banks and coffee shops and located on the perimeter of the main shopping complex, to help drive retail traffic to the mall and reposition the tenant mix. “The Golf Mill center has an amazing location and anchor rents in the low single digits, but the previous owner didn’t want to make the investment to develop the out parcels,” says Munder. In today’s competitive retail industry, though, he says it is critical to stay ahead of tenant needs. “Competitive properties will attempt to steal tenants, even if a retailer has five years left on their lease. If you haven’t made improvements and they see two years free rent elsewhere, they might move,” Munder says. “Tenants who see owners not investing in the location or making improvements, it clearly affects their decision to exercise lease options going forward.”