With most of the “easy” deals already snapped off the market, the remaining opportunities require a high level of expertise to pull off.
you have to be more creative with your plan than you were even a few years ago,” says Gershon Alexander, principal and head of acquisitions for Northpath Investments, a firm that invests exclusively in value-add opportunities in the Northeast. “There’s a tremendous amount of risk with value-add retail. It’s very speculative, and there are so many things that are completely out of your control that could go wrong. You could easily end up losing money.”
Northpath recently acquired Milford Plaza, a 180,315-sq.-ft. shopping center located in the coastal Connecticut community of Milford. Regional grocer ShopRite previously anchored the center, but then moved to another property across the street.
“When you have a grocery-anchored center, and you lose your grocer, that’s usually a kiss of death because there aren’t that many grocers [to backfill the space],” Alexander notes.
Fortunately, the seller, a private investor, was able to backfill a portion of the ShopRite space with G-Mart, a local grocer that specializes in Asian food. G-Mart opened its doors in March 2021 and occupies 33 percent of the center. Other tenants include Bob’s Stores, Planet Fitness, Dollar Tree, and Hartford Healthcare.
Even with a new grocer in place, Milford Plaza still needs work, according to Alexander. It is currently 92 percent leased, but one of the center’s larger tenants wants to give back some space. Additionally, the property itself is in poor condition.
“This is a property that offers the opportunity for someone like us, with fresh capital, to put in needed upgrades that allow us to lease up the vacancy,” Alexander says. “We’ll be able to turn a mostly non-performing center into a performing center.”
Finding that needle in a haystack
The scarcity of value-add investment opportunities within the grocery-anchored space is directly correlated to the aggressive disposition plans that many REITs and large owners executed from 2010 to 2019. Over that 10-year period, these entities shed assets that they considered inferior or non-strategic. Now that they’ve completed their disposition programs, they’re in acquisition mode again.
Consider Brixmor Property Group Inc.—the REIT embarked on an aggressive capital recycling program and sold out of markets where it owned single assets, according to Mark Horgan, executive vice president, and chief investment officer. Now, Brixmor is focused on investing in retail centers that are “value-oriented.”
“We’re looking for properties where we can be creative and drive value,” Horgan says.
In 2020, Brixmor embarked on a value-add strategy for Venice Village, a 172,000-sq.-ft. Publix-anchored center near Sarasota, Fla., that it acquired in 2017. The $9.5-million redevelopment includes the demolition of a 30-year-old Publix and the construction of a new 48,000-sq.-ft. Publix prototype store, as well as right-sizing the small shop GLA.
Other upgrades include façade improvements, landscaping, and parking enhancements, and the incorporation of sustainable features, including LED lighting. Brixmor expects an incremental NOI yield of 10 percent.
Value-add centers that are trading are primarily strategic one-off dispositions or owned by families or other private investors that no longer have any interest in the property. RPT Realty, for example, recently sold Market Plaza, a 166,572-sq.-ft., Jewel-Osco-anchored center in Glen Ellyn, Ill., outside Chicago. North American Real Estate Group acquired the 1960s-era property for $30.2 million.
“Current market demand is also creating opportunities for us to monetize assets at attractive yields in non-core markets,” says Brian L. Harper, president, and CEO of RPT Realty. s
It’s worth noting that in late 2019, an unknown buyer put Market Plaza under contract for $36 million but then canceled the acquisition in mid-February 2020 due to uncertainties related to COVID-19. The property, which houses a diverse mix of retailers including Ross Dress for Less, Dollar Tree, Staples, and Sherwin-Williams, is 90 percent occupied.
This time around, Market Plaza received 11 offers before selling at a high 5 percent buyer’s cap rate, according to Harper.
“There are a handful of value-add transactions that come to market … that become a feeding frenzy from investors [because the opportunity to add value is obvious],” says Bryan Ley, managing director with JLL Capital Markets. “Those opportunities will be priced aggressively. Other lighter value-add opportunities, or those that require much heavier work that may turn into value-add gems, get overlooked by much of the competition because of the level of work involved.”
Different flavors of value-add
It’s almost impossible to find value-add opportunities that primarily involve taking care of deferred maintenance, sprucing up the center, and pushing up rental rates. With the exception of a few shabby centers here and there, retail investors have already scooped up those properties and updated them.
Of the value-add opportunities that exist today, most involve finding a new tenant for vacant anchor spaces, leasing dark small shop space, or replacing underperforming retailers with fresher concepts at higher rents. Centers that also include the opportunity to develop pad sites or expand the property are even more attractive.
Consider Citivest Commercial Investments’ recent acquisition in Helena, Mont.: the firm bought a 116,992-sq.ft. the building formerly occupied by Shopko. Purchased in conjunction with Sage Investco, the value-add investment also includes two undeveloped pad sites.
Citivest President Dana Haynes says the firm plans to demolish the former Shopko space and bring a few select national retailers to Helena. In addition, it will develop the pad sites; one is already ground-leased to Chick-Fil-A, which will be the first in Helena and only the second in the entire state.
Value-add deals like this require investors to take on a significant level of risk. These properties require a lot of work and are particularly vulnerable to changing market conditions, something the pandemic has brought plenty of.
“Sometimes, properties are marketed as value-add where the upside is unlikely to ever be achieved,” says Matt Annibale, senior director of acquisitions with First National Realty Partners (FNRP), a Red Bank, N.J.-based investment firm that focuses almost exclusively on grocery-anchored centers. “We see this often arise in situations where a center might be 85 percent leased, but 10 percent of the remaining vacancy will be nearly impossible to lease.”
Still some meat on the bone
For Annibale’s firm, a great value-add deal is generally a non-stabilized property with a well-known anchor that it can extend long-term, a vacant anchor or junior anchor space, or one with outparcel development and spin-off opportunities.
In 2021, FNRP acquired 18 grocery-anchored centers with more than 2.9 million sq. ft. of GLA for in excess of $384 million. Several of the firm’s recent acquisitions have value-add components.
For example, it acquired Premier Canton, a 164,781-sq.-ft. shopping center located in suburban Detroit. Anchored by a 59,805-sq.-ft. Kroger Supermarket, the property is 88 percent occupied with a vacant 18,000-sq.-ft. junior box.
“The junior box vacancy provides the potential for significant upside in the deal,” Annibale says.
FNRP made a similar value-add buy in Harrisburg, Pa., with the acquisition of Summerdale Plaza. Kmart previously anchored the 141,451-sq.ft. center and the space has since been demised and re-tenanted with a brand new Tractor Supply.
Other tenants include Rite Aid, AutoZone, and Dollar Tree. A non-retail tenant, the Pennsylvania Department of Transportation, also leases space in the center. The location, which issues Real IDs, is one of the busiest in the state and helps drive traffic to the center.
When FNRP acquired Summerdale Plaza, the property was 85 percent leased. Roughly 16,000 sq. ft. of the former Kmart, as well as two small shop spaces, remain vacant.
“The seller was a private investor who had owned the property for a long time, and we think there’s some meat left on the bone for us,” Annibale says. “The upside for Summerdale Plaza is pretty straightforward: leasing up the vacant space. We’re exploring backfilling the larger space with a grocer that has a smaller footprint.”
Fewer grocers to backfill dark boxes
Value-add plays are riskier than ever before because the pool of potential retailers to backfill vacant space is not only limited but also smaller than it was even five years ago.
“There aren’t that many retailers looking for space,” Alexander says. “We’ve lost a lot to bankruptcies, closures, and consolidation, and there just aren’t enough new ones that have popped up. And because America is over-retailed, centers are competing for the same tenants.”
Consolidation within the grocery sector has been rampant over the past 10 or so years. Most recently, regional grocers have joined forces in an effort to compete more effectively against industry behemoths. For example, West Coast operator Raley’s acquired Bashas Family of Stores, while Price Chopper/Market 32 and Top Markets merged this year.
In November, C&S Wholesale Grocers announced it agreed to buy 12 Tops Markets stores and would rebrand them under the Grand Union brand. This deal comes a few months after C&S purchased Wisconsin-based Piggly Wiggly Midwest.
While it’s too soon to say whether the recent consolidation activity will result in store closures, it’s not too soon to point out that fewer grocers and fewer brands mean fewer options to fill dark boxes.
“Being able to fill that vacant anchor box with a grocer, when no grocer previously existed at that shopping center before is a huge coup because that creates tremendous value for the investor and also improves their ultimate selling price, as grocery-anchored centers are in such demand in the market,” Ley says.
Beyond grocers, the pool of small shop retailers has shrunk as well. The pandemic has forced many small shop retailers to close their doors permanently. From nail salons to mom-and-pop restaurants, these businesses didn’t have the financial resources to withstand prolonged shutdowns and cautious customers.
Relying on relationships to realize value
Buyers (and their lenders) must feel confident that they can execute these re-positioning and re-leasing strategies. “Retail requires significantly more planning and homework to make sure the business plan is executable,” Ley says.
Experts agree that buyers must have a deep and strong network of relationships with retailers and an active leasing team to successfully execute this type of value-add strategy. In fact, the quality of those relationships often influences whether an investor sees any value-add opportunity.
“We also see unique opportunities to acquire value-add or opportunistic centers, where we can utilize our tenant relationships to create significant value after the purchase,” says RPT Realty’s Harper. “We can go in with long-standing relationships, whether it’s grocer or wholesale or home improvement or maybe some off-price tenants, such as TJX, in our back pocket and buy some value-add centers in core MSAs with high density, high-income trade areas and replace that vacancy, maybe even in due diligence, and stabilize that 7 percent or north.”
As of the end of the third quarter, RPT Realty was negotiating to buy an asset in the Southeast that has an empty anchor box related to a recent tenant bankruptcy. The REIT was in talks with a premier investment-grade grocer to take that space, which would drive the occupancy to about 99 percent and result in an estimated stabilized yield on cost of 7 percent in a 5 percent cap rate market, according to Harper.
“Sometimes, value-add opportunities can be straightforward, such as re-leasing a vacant box, while other times, the upside may be more complex,” Annibale says, adding that FNRP feels that its ability to leverage its in-house leasing and property management teams provides a competitive advantage going into deals. “The important thing is to have a game plan going into the deal and to solve for as many unknowns as you can ahead of time.”