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. The revolution in shopping trends that may be seen as widespread disruption 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, Georgia. Adam Munder, Sterling Organization Purchased out of special servicing for $10.6M in October 2014, the grocery-anchored retail specialist was faced with an occupancy rate at the shopping center of just 31 percent after the two key anchors, Publix grocers and Rite Aid Pharmacy, decided to vacate the site. However, despite allowing their stores to “go dark,” says Sterling principal and chief marketing officer Adam Munder, 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 that, 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.” The retail sector saw 2014 sales volume surpass its 2007 peak, with 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 that 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 on deal flow. 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 by Sterling was the $58.8M acquisition of Golf Mill Shopping Center in Niles, Illinois. Housing such retailers as Target, J.C. Penney, Kohl’s, and Sears, the 1.1M-square-foot mall—which Sterling owns 886,000-square-feet of—will see 86 percent of its leases roll by the end of 2016. For Sterling, however, 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 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,” Munder says. In today’s competitive retail industry, 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. “For tenants who see owners not investing in the location or making improvements, it clearly affects their decision to exercise lease options going forward.”
Buying retail centers where 86 percent of the leases roll within 18 months, or where occupancy is just 31 percent, might seem daunting for some. But for others, it’s an opportunity.
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