Pockets Of Opportunity?
Commercial real estate (CRE) is an interesting asset class because the way its performance is commonly reported in contrast with other asset classes such as stocks and bonds makes it appear monolithic, as if it moves up and down in unison. The reality, however, is that within the asset class, volatility can exist across the different property types. For example, office buildings and self storage have been nabbing headlines in recent weeks as investor anxiety is on the rise over the performance of these assets. On the other hand, there are virtually always pockets of opportunity for savvy investors willing to examine the market closely.
Strip Malls Are Hot
The Wall Street Journal recently published a piece identifying one such opportunity, and they put it plainly: “Strip malls are hot.”
In her article entitled, The Hottest Real-Estate Play Is in Your Neighborhood, author Jinjoo Lee cites a supporting trend, using data gathered by Green Street, which shows a widening spread between physical occupancy and leased occupancy at strip retail centers. Leased occupancy hit an 8-year high at 95.3% as of the first quarter of this year, as compared to physical occupancy hovering around its pre-pandemic mark at 92.4%. The reason: “In this market, the gap exists because landlords are signing leases more quickly than retailers have been able to move in.”
Another sign of strength for retail strip centers is the relative ease with which landlords are currently able to lease big box spaces of 10,000 sq ft or more. In 2017 and 2018 it was much more common that landlords would need to renovate and subdivide those spaces into smaller footprints attractive to smaller tenants.
According to Fred Battisti Jr., Chief Revenue Officer at First National Realty Partners (FNRP), “The depth of national credit retailers vying for junior anchor box space is incredibly strong. The recent bankruptcies with tenants such as Bed Bath and Beyond, Tuesday Morning and Party City provided a unique opportunity for buyers such as ourselves at FNRP. Given the robust interest in that size space we are finding opportunities to replace these bankrupt retailers with an investment grade national tenant at a positive spread over the prior rent.”
Foot traffic is another key measure of performance for retail properties, and strip centers have performed on average ten percentage points better than large mall centers in recent years.
Flexible Working Environments Fueling Growth In Retail Outside City Centers
As Lee reports: One reason for strip malls’ strength is the widespread shift to a flexible working environment, which means consumers are spending more time at home rather than city centers where their offices are. Conor Flynn, CEO of Kimco Realty, the largest shopping-center-focused REIT, said during an industry conference in June that the flexible work environment has led to a pickup in visits to the shopping center. Some two million people left America’s largest cities in 2021 and 2022. Meanwhile, around 1.3 million people migrated to suburbs and exurbs, according to a report from bipartisan public-policy organization Economic Innovation Group.
With office occupancy still at only half pre-pandemic levels, workday lunches have migrated out of downtown city centers, leading to a pickup at restaurants in strip centers closer to people’s homes. Personal care services such as massage, chiropractic, medical laboratory, and dental services — all prototypical tenants at strip retail centers — has seen strong demand in recent years.
Lee continues: Moreover, the pandemic’s boost to online shopping hasn’t dented bricks-and-mortar retail demand as the industry had feared. Physical retail is being used to fulfill e-commerce orders and returns. Having a store near homes makes it easier for consumers to, say, order items online and then to pick up or return in stores. Click-and-collect sales are expected to comprise 8.5% of online retail sales this year, according to an estimate from eMarketer. There has also been a lack of new supply for such shopping centers, which has helped drive up demand, according to Michael Goldsmith, equity analyst at UBS.
Even Abercrombie & Fitch, a brand strongly associated with malls, has said its store base will likely shift more off-mall as it reviews its real estate. Macy’s said on its last earnings call in June that off-mall retail is the “dominant in-person shopping method” for U.S. consumers. Signet Jewelers said at its investor day in April that off-mall stores see higher revenue growth and attractive economics compared with malls, noting that these stores also have lower occupancy costs. Others shifting off-mall include Foot Locker and Bath & Body Works.
Investors Making The Retail Strip Center Play
What is a savvy investor to make of these market signals? As the author remarks in the article’s title, “The Hottest Real-Estate Play Is In Your Neighborhood,” but of course you can’t simply walk over to your nearest strip center and make an investment. Furthermore, investing only in one’s own neighborhood would lead to portfolio concentration in a single market rather than adherence to the conventional wisdom of diversification.
Many individual investors look to co-invest alongside experienced commercial real estate operators who provide access to opportunities they wouldn’t have the resources to source on their own.
“As one of the leading acquirers of grocery-anchored retail, FNRP sources acquisition opportunities across the country. Our vertically integrated platform allows us to evaluate and acquire best-of-the-best opportunities, that maximize investor returns, while minimizing risk,” says Mike Hazinski, FNRP’s Chief Investment Officer.
FNRP’s Investment Thesis
The First National Realty Partners (FNRP) team has developed a carefully considered investment strategy, designed to adapt to evolving market conditions and identify risk-adjusted opportunities in neighborhoods all across the United States.
Currently, FNRP’s primary focus is grocery-anchored shopping centers. Two other types of opportunities FNRP looks for, supported by many of the same economic trends discussed in Lee’s article, include premium multi-family housing and strategically-located industrial properties.
Andrew DeNardo, President and Head of Investor Relations at FNRP, says, “Retail was once thought of in 2017-2018 as a suffering asset class with the emergence of ecommerce and Amazon. FNRP saw this as an opportunity in CRE then. Now in light of this Wall Street Journal article, we see that investor sentiment is changing and our belief in our thesis is as strong as ever.”
The 2,500+ Partners who invest alongside FNRP in its properties say they do so because they value the firm’s deep expertise, large geographic footprint spanning 23 states, and attractive risk-adjusted returns. They also appreciate the smooth, fully passive investment process with white-glove support along the way from a team of seasoned CRE experts.
How To Get Involved
If you would like to explore investing in the retail strip center play, we’d welcome the chance to get to know you. Please get in touch with our Investor Relations team by emailing ir@fnrpusa.com, calling 855-622-3677, or simply click on the button below to schedule a consultation.
