I’ve written previously about my interest in grocery-anchored shopping centers. Retail has been an ugly duckling among the real estate landscape for a long time. Big name retailers have had a tough time finding their spot versus e-commerce competition for about a decade. Look no further than GAP letting go its CEO after a short tenure (and its prior CEO was similarly canned).
Our investments in grocery anchored (or shadow anchored) shopping centers have done remarkably well, despite investing the majority of the capital mere months before the pandemic started. A number of the investments are printing mid-teens cash-on-cash returns, stunningly higher than what I personally expected.
We recently invested in a shopping center deal that placed debt around ~4.75% and has a cap rate (unlevered yield) of about ~7.25%, so a spread of 2.5% between debt and unlevered yield. That’s about my line in the sand on how much spread I need for real estate investments. This deal’s spread should widen as outparcels (e.g., Starbucks pads, etc.) are sold off, returning capital and increasing the unlevered yield on the remaining capital invested to between 9-11%.
That said, the door on investing in grocery anchored shopping centers appears to be closing or is closed going forward. Rates on debt have climbed since this deal was signed and cap rates haven’t yet moved. Thus the spread between debt and unlevered yield is collapsing, reducing potential investor returns. Furthermore, the asset class has seen a material change in investor sentiment. One of our investment managers recently commented:
Our original thesis led us to take advantage of mispriced, stabilized assets due to the public perception of retail in general. That perception has changed drastically the last 12 months and grocery anchored retail is quickly becoming (or has become) one of the most desired asset classes for public and private investors.
To that end, it appears that the only asset class within real estate that I know of with an “icky” factor is office, given the major lack of consensus in transitory / permanent nature of work from home trends. I haven’t seen a strong actionable thesis yet that is investable, but presume that will materialize as the pandemic recedes from memory and business practices find some level of normal.