Creating Value in Retail Properties

Data is cheap and easily available these days, but understanding how to create value from a retail building is not. I was sitting in a major retail property owner’s office this week, as he told me how much he loved an exclusive listing of mine, but mistakenly concluded that it was overpriced. He pointed out that interest rates aren’t coming down anytime soon, which I could not dispute, but our discussion ultimately landed on the heart of the matter: the potential to create value at the location.

Which brings me to my topic today. Rising interest rates notwithstanding, creating value is the main reason that people prefer retail properties over other investments like the 10-year treasury. You cannot build value with a note; you’re locked into that rate for the life of the investment. With retail properties, however, shrewd decisions increase cash flow, what is usually called “value add.” Ultimately, strategies to add value break down into three categories:

1.??????Repositioning the asset.

2.??????Improving management.

3.??????Applying knowledge of…

a.??????A market inefficiency.

b.??????Exceptional leasing opportunities, such as having a high-quality retailer already interested in the building.

c.??????Other information that’s not baked into the sale price of a building.

Perhaps the greatest example of creating retail value might be what Harry Macklowe did for Apple at the GM Building.

OK great, so who cares? The biggest challenge to buying NYC retail properties remains the quickly rising cost of debt. It’s a fact that banks see some retail as risky, and it’s also true that retail investors were looking at financing at 3-5% in January, whereas today they are looking at 5-7%, likely to go up further.

Going back to the aforementioned investor, he told me that he has nearly 100 retail properties and only 4 vacancies, with bidding wars from retailers on each availability, and I believed him. This guy really knows how to create value, but it’s not because of broad economic data. Rather, he draws on his intimate knowledge of NYC retail, enabling him to create value where others don’t see potential.

Ultimately, the value of NYC retail properties will always depend to a significant extent on the performance of the retail sector. With that in mind, I present some data of my own:

BAM: In past nine months, twice as many stores have opened as closed.

???????????????BAM: Core retail sales are up 19% over pre-pandemic levels, inflation adjusted.

???????????????BAM: As of August there was a 5.4% increase in store-based sales year over year.

Small bam: Demand for dominant retail locations is fierce. Good luck finding a vacant A+ retail location in NYC over the next five years.

Taking this all in, there are far more buyers of retail properties right now than sellers, but those who know how to create value are few and far between. In fact, the buyers who know never really left the market. They stay in the game, because they understand the details in retail.?