Why We’re Buying Southeastern U.S. Shopping Centers
Despite plenty of negative press, physical “bricks and mortar” retail is not dying. General investor sentiment towards retail may be poor, but we’re contrarian investors and have been acquiring actively in the sector for the past two years. Here are three reasons we are bullish on well-located Southeastern retail:
Our Retailers Are Opening, Not Closing Stores
2017 store openings were heavily concentrated in the discount, beauty and smaller format space and we expect this trend to continue. Recently, we’ve acquired centers with financially healthy, growing retailers including Ross Dress for Less, Publix, CitiTrends, Big Lots!, and Kroger.
2017 Store Openings, Various Sources
Demographics and Growth
The Milken Institute, a leading thinktank, recently released its annual “Best Performing Cities” report. 40% of its 50 best-performing large cities are located in the Southeast. We look to acquire well-located assets in growing submarkets of these cities, with solid household incomes, annual population growth of 1.5% or greater, and low unemployment. We’ve recently acquired, or placed deals under contract, in markets such as Orlando, Atlanta, and Nashville.
Sources: Milken Institute, “200 Best Performing Large Cities, 2017.” Green dots represent the Milken Institute’s Top 50 large U.S. cities.
Pricing
We regularly tell investors to compare a shopping center in the Southeast with a similar center in California, because the spread in going-in cap rates between the two – despite their similarities – will generally be 200-300 bps. While we maintain an office in Los Angeles, we believe the Southeast is fundamentally mis-priced. We tend to buy well below replacement cost, which offers us downside protection and the ability to negotiate with tenants seeking lower occupancy costs.
Source: CBRE 2H17 Cap Rate Survey: U.S. Neighborhood/Community Center – Class A Stabilized Cap Rates