In a recent article titled “Finding Value in a Value-Already-Added-World”, Senior VP Pierce Mayson provided insights on the topic.

 

Mayson emphasized how there is “essentially zero-value-add product left among Class A retail spaces” and the few deals he’s seen “are located in secondary and tertiary markets.” While some investors are exploring deeper opportunities in Sunbelt markets and major cities, many are also shifting towards smaller deals in the Midwest, Northeast, and other regions. The reason being that in these regions “there has been more available product and cap rates have been more accretive“, according to Mayson.

 

In the discussion on improving existing properties and rethinking tenants, Mayson says there is “a lot of capital sitting on the sidelines waiting for these exact scenarios”, in regards to debt-forced sales.

Recently, buyers of strip centers looking for value have not hesitated to increase rents for tenants paying below-market rates, Mayson noted. “That risk is almost completely mitigated by the vast number of replacement tenants out there waiting for spaces,” he added.

 

Regarding whether value-add acquisitions are possible right now, Mayson says due to tenants becoming less likely to move as a result of the tight leasing market, owners of many fully occupied centers have become “less willing to part with them“. He states that this situation drives rents and occupancy rates even higher, coinciding with institutional investors actively seeking opportunities.

With the already growing interest of retailers in existing space, Mayson believes there is virtually no speculative retail development, with only a few new projects breaking ground—primarily grocery-anchored centers, where “programmatic” in-line spaces “tend to lease very-quickly“. In this scenario, there are a few improvements needed in order to entice tenants. Opportunities do exist thanks to “extreme mismanagement” or local ownership that may not have the capital to improve them, however Mayson says these are becoming even scarcer.

“Construction is still too expensive to justify without an anchor in place, and even these few anchored developments being built have gotten extremely thin on returns,” Mayson said.

Therefore, Mayson believes that investors will likely continue seeking value-adds over the next few years.

 

Read the full article here to gain more insights on how to find value in these market conditions.