🥊 Tenant wars fueling retail's renaissance

👋 Hello, friends! One Federal Reserve official warned this week that we could be in for an interest rate hike rather than a cut. What a roller coaster.

In this week’s newsletter, retail tenants compete, an investor goes “dirt-first,” and a converted church brings in $2 million.

Today’s edition is brought to you by Ascent Equity, a real estate investment firm that helps accredited investors build wealth through strategic, passive investments in multifamily properties. Discover the benefits of pref equity with Ascent Equity here.

Let’s roll!

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CRE HEADLINES

💰 $2.1 Billion Multifamily Bet: New York-based private-equity firm KKR has paid $2.1 billion for more than 5,200 apartment units across the country, signaling that big investment firms are betting on a multifamily rebound.

📉 Apartment Starts Plummet: Starts for buildings with five or more units fell 51.7% YoY in May to a seasonally adjusted rate of 278,000, according to a report from HUD and the U.S. Census Bureau.

🍊 Taxes Squeeze Industrial: Property tax sticker shock is hitting warehouse occupiers, as industrial properties have seen a 29.6% average increase in assessments over the last five years with property taxes growing by 21.3%.

⚡Stress Tested: The largest U.S. banks have shown they can withstand severe economic shocks, demonstrating the ability to absorb $685 billion in losses, including a 40% drop in CRE values.

🚨 State of CRE: National CRE asking prices PSF rose 3.76% in May while cap rates compressed to 6.6%. Retail and office led growth while multifamily remained stable. Top markets included NYC, San Diego, San Francisco, Miami, and Los Angeles.

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TENANT WARS FUELING RETAIL’S RENAISSANCE

Retail is having a moment. After years of minimal shopping center development boosted by post-pandemic sales growth, retailers now find themselves competing for scarce available space — a sharp contrast to the not-so-recent past when landlords hunted for (and struggled to find) tenants.

⚖️ Supply Squeeze, Demand Surge: Available retail space has hit historic lows, with availability declining across box sizes and regions. Large national retailers are aggressively expanding, contributing to the demand surge and intensifying competition for prime locations. This has led to higher rents, stricter lease terms, and record-fast leasing speeds.

⛽ Filling Up Fast: The average time to secure a tenant has declined to 8.5 months, the quickest pace in over 20 years. Over 80% of retail spaces are leased within six months of listing while 98% are leased within nine months. In the last year, nearly half of all retail vacancies have been filled within just three months.

👊 Quality + Quantity: Retail investor/evangelist and Best Ever Show host Ash Patel says that recently, he’s been turning away smaller tenants because he knows bigger ones are ready to pounce, allowing him the luxury of being more selective. “We’ve never had a higher caliber of tenants knocking down our doors,” he said in a recent episode. “We’re getting flooded like we’ve never gotten flooded before with big national tenants wanting to sign 10-, 15-year leases. Retail is the healthiest it’s ever been in history. So we’re rockin’.”

WHAT IT ALL MEANS

This new dynamic of intense competition for space among retailers — big box and otherwise — requires them to adopt more aggressive and creative leasing strategies, often paying premium prices for prime locations (great for landlords). As the trend persists, pressure on rents will likely continue and a potential resurgence in retail development to meet demand could be on the horizon.

🎧 Listen to Ash’s take on the state of retail and more.

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WHAT IS PREF EQUITY?

Understanding the pros and cons of a deal's capital stack is crucial when deciding if an opportunity is the right fit for your portfolio.

In this short video, the experts at Ascent Equity Group explain the difference between preferred and common equity deal structures and their impact on your returns.

➡️ Discover the benefits of pref equity here.

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THE ‘DIRT-FIRST’ APPROACH

Joel Owens, owner of NNN Invest, which specializes in single- and multi-tenant triple-net properties, joined host Ash Patel on the Best Ever Show this week. In this episode, Owens discusses the many facets of NNN investing, including why he prefers single-tenant buildings over multi-tenant strip malls.

🏙️ Single vs. Multi-Tenant: Typically, investors view having multi-tenant properties as safer than having a single-tenant building because you can absorb vacancy easier if you have multiple paying tenants. Owens counters that thinking with his more analytical, opportunistic approach.

🚜 The Dirt-First Approach: Owens says that when evaluating a property, above all else, he looks at the dirt, focusing on attributes like layout, sight lines, and traffic count. “I would take, any day, a single tenant, that’s maybe paying below market rent, that’s on a premium corner … and it has some crap tenant, but the dirt’s good.”

🧠 Why Dirt-First?: If the dirt’s good, Owens says, he can win in two ways. “If [the tenant] keep[s] paying, I can have a super high cap rate or high yield. If they go out, I can just demolish that building — and the dirt it’s sitting on, I can either ground lease it to Raising Cane’s or a Chick-fil-A that’s gonna pay hundreds of thousands of dollars in rent. So it’s all about the dirt. It’s all situational.”

👉 Get more of Joel’s insights on the Best Ever Show here.

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CHURCH CONVERSION ADDS $2M IN VALUE

Lior Rozhansky and the team at Flora Capital are converting this old church into a multifamily property, adding over $2 million in value in less than two years. Here's how they’re doing it 👇

🏢 Property Details: This 6,000-square-foot church was purchased in January 2022 in Dorchester, MA, and converted into six residential units.

💸 Finances: The property was purchased for $900,000, and the team raised $440,000 as preferred equity at 15% annualized rates with no participation in upside. At acquisition, the team secured a bridge loan while they went through a 15-month zoning and permitting process. Once they got approvals, they refinanced into a construction loan. Now, they are in talks with local lenders and community banks to secure long-term fixed debt.

💼 Business Plan: The team did a complete renovation of the building for $1.35 million. The all-in cost will be roughly $2.6 million, accounting for zoning, permitting, and application fees. The rents for these units range from $3,200 for a 2B/2BA unit to $4,200 for a 3B/2BA. The plan is to hold the asset long-term and refinance to return all LP pref equity.

🍾 Results: Renovations and lease-outs will be completed by the end of July. The projected valuation once fully leased could reach $3.4 million. LPs are set to receive their 15% annualized return on principal and would see all pref equity returned upon refinancing.

If you have a deal you'd like us to feature, share it with us!

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FREE LIVE EVENT WITH JOHN CHANG

Mark your calendar for July 9, as Best Ever community favorite John Chang, senior vice president and national director of research and advisory services at Marcus & Millichap, hosts the Best Ever Mid-year Economic Update.

🗓️ Date: July 9
⌚ Time: 3 p.m. ET (12 p.m. PT)
⏳ Duration: 90 Minutes
💻 Location: Online
😊 Price: FREE! 

In this live virtual event, Chang will dive into the data to share his mid-year CRE insights and predictions for the rest of 2024 and beyond.

👉 Register today before seats fill up.

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FREE DOCUMENT DOWNLOAD

Everything You Need to Know About Sales Assumptions When Underwriting an Apartment Deal

So, you’ve found a deal interesting enough to underwrite. But how do you fill in the blanks on key financials when you don’t have all the details? This document outlines how to think about the sales assumptions you need to set when initially underwriting an apartment deal, from NOI and exit cap rate to sales proceeds.

👉 Download now!

🙏 Thanks for reading!

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Have a Best Ever day!

—Joe Fairless