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Renovation Yields Best Profits in Retail

By September 18, 2015No Comments

Given a choice of retail acquisition/disposition, holding/managing properties or developing ground-up properties, the best money is made in the process of acquiring, renovating and selling, said panelists at ICSC’s Western Division Conference here yesterday. Speakers in the general session “How to Make Money in Retail Real Estate … and Keep it!” said value creation comes from repositioning an obsolete or aging shopping center and turning it into something fresh and exciting for customers.

Moderator Michael Kercheval, president and CEO of ICSC—who is retiring today and being replaced by Tom McGee, currently vice chairman of Deloitte LLP—asked panelists over the next five years, which stage of investment generally offers the greatest potential for value creation, and most said that acquisition is the best place to make money. Bill Passo, CEO and founder of Passco Cos., said he recommends buying low and selling high by having staying power and a smart business plan, and he also recommends using other people’s money, such as banks and JVs, in order to achieve goals.

Steve Bram, principal/senior director and co-founder of George Smith Partners Inc., says his firm sits “in the shoes of the sponsor. How are they going to make the most money out of the deal? Holding and managing a property holds less risk, but also the least return; developing is the second most-profitable strategy, but your issues are that land will likely not be infill, which is more risky. Plus, do we need to build a lot more retail centers? Probably not. Acquisition, renovation and disposition of an asset is the most profitable route, and there’s a whole array of financingoptions available for these deals.”

Bram also suggested not preleasing retail space under construction before a property is ready to be occupied because then tenants will know you’re dependent on them to get the loan and will use that as a leverage point to reduce rent.

Smart & Final Stores’ VP real estate Pat Barber said, “There’s way more opportunity on acquisition of existing assets than on development.” His firm currently has 260 stores throughout the country.

Kercheval also asked the panelists the best way to invest $10 million in retail real estate today. Most said urban and mixed-use properties were the smartest way to go. Larry Kosmont, president, CEO and founder of Kosmont Cos., recommended looking for urban properties near transit, which changes density and adds creative value for the investor. “Follow public policy. See where the investment is going into infrastructure and follow that investment.”

Arthur Pearlman, founder and chairman of Arthur Pearlman Corp., said he won’t invest in suburban centers. “For every 5,000 homes in a 1.5-mile radius, you can build one shopping centerand generate jobs and income. I’m cautious about suburban development, but would invest in urban and mixed use.”

Chris Wilson, EVP of JLL, retail, and retail brokerage lead for the Southwest market, said he would sit on the cash. “I’m looking at the cycle, and there are always troughs and peaks. I believe we have two years left in this cycle.”

Kercheval asked the panelists when the peak of the cycle will hit in retail real estate, and most said either 2017 or 2018—predictions ranged from six months to three years until the end of growth in this cycle. Wilson said, “Yields are as low as they’ve ever been. Nobody knows when the cycle will end—it’s a parlor game.”

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