Are Retail Strip Centers the Next Hot Real Estate Trend? | Top of Mind Series

Hello and welcome back to another episode of the Invest Like a Billionaire podcast. I am your co-host Ben Frazier, joined by fellow co-host Bob Fraser, and we've got another top of mind episode for you today. And so these are kind of shorter episodes where we focus on one particular topic that's kind of newsworthy or something that jumps out to us, or even things that are submitted by, uh, our investors or people that are listening, asking questions about what's going on. And one that kind of stuck out to us, uh, felt like a little bit of a pat on the back 'cause this is something we've been looking at for a while. And, uh, you know, of our favorite publications, The Wall Street Journal, just published an article and it's called The Hottest Real Estate Plays in Your Neighborhood. And it's actually talking about neighborhood retail strip centers as being the hottest play in real estate right now.

You, our investors, have gotten in in a big way.

Yeah.

Congratulations.

So this is an asset class that we really started looking at early the beginning of last year and started looking at in a a very focused way is seeing the potential from all these different dynamics playing out. And so, you know, I've kind of have mixed emotions about this article because one, it feels good that, hey, they're substantiating something that we've been seeing for a little while. But two, I don't really want to get the secret out too much just yet. You know, I mean, you know, our listenership isn't so massive that it's going to, you know, throw the industry off. But I want to buy a lot more of these deals.

I know.

So it's, you know, I've kind of, kind of conflicted, but The interesting points that they make, you know, one, and this is something we talked about before.

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They're not building any more of these strip centers.

So these strip centers are the ones— ones we're talking about are the ones that are in the suburbs. They're in your neighborhood, right? And it's just these little, little strip centers that have generally services, right? So it's the restaurants, the bars, the dog groomer, the nail salon, the little workout place, you know, and these are, these are not being intermediated by online and, and they're freaking booming. And in spite of, you know, quote, the recession, in spite of COVID etc.

Yeah. So what's interesting about these is they're not the big box, you know, retailers that you see that are, you know, have the big names in there, the triple credit tenant-rated tenants. It's not your shopping malls, right? These aren't the ones that are ghost towns, you know, in the middle of suburbs there. These are kind of right by neighborhoods and they're generally smaller, more service-based businesses. And what's really interesting about it and kind of some of the points they make in this article is the way COVID has kind of changed, you know, just the work you know, balance that people are working a lot more from home.

They're closer to their home.

Yeah.

They're spending more time at their home. And so they want to, they get the services near their home.

Yeah. And so this is a trend that, you know, we believe is going to, you know, stabilize at a pretty, you know, strong direction towards a nice balance between work and office, but definitely a lot more home than there was, you know, pre-COVID.

Right.

And so this is not something that's gonna be kind of a quick hit and, you know, revert back to the prior mean. I think this is going to be something that we're going to see a trend continue of where people are wanting to shop closer to home. And the biggest pushback we always get on these types of deals is, oh, well, retail is dead, right? Because we know it's been dead for a long time because Amazon's come in and just completely obliterated, you know, retail. But what's interesting, and we've shown this in past, you know, episodes, you can go back and listen to, e-commerce has really, you know, it's skyrocketed from percent of total retail sales, but it's actually plateauing. So the amount of sales, retail sales that are being, are happening in a given year are kind of stabilizing at the rates they are now where there's still a lot of online activity, but not as much as there—

And the article has even, even says the online hasn't dented these bricks and mortar locations.

Yeah.

In fact, they're being used, they're making the point in the article, they're being used to deliver local delivery of, you know, online pickup of, of online purchases.

Yes.

And they make the point. But, you know, you can't, you can't replace your liquor store. You can't replace your nail salon online. And you're not buying your haircuts online either.

Yep.

You know, so it's these kind of things. And some of the things they didn't mention in the article, but, but it's true of these neighborhood retail is one, they're, they're, they're very cheap. You can buy them at a 9% cap rate, which is, you know, about half the price of an equivalent multi— same dollar earned. Yeah, you pay half for it for a dollar of retail earnings and then you do a dollar of multifamily earnings.

Yeah.

And that's insane.

Yeah.

And they're on sale and they've— they have not been built. These things you think about the last time you saw a strip mall being built. Yeah, there's nothing.

But you can't think of the last 15 or 20 years.

Yeah. And so these— and they're selling right now at about half of replacement cost. So meaning, you know, if it's a $3 million strip mall, you're buying it for $3 million. If you were to tear it down and rebuild it, it would cost $6 million. What does that tell you? The prices are going up for these things. So yeah, it's just— it's really a— it's really just a fantastic opportunity, one that we've been following for quite a while and we've happily placed our investors in and one we want to place a whole lot more. I'd love to buy a few million dollars worth of this stuff and then sell it off to REITs at some point.

Yeah, absolutely. I mean, just to recap here, we've got, you know, the same or decreasing supply and it's not economical to build new supply. We have strong retail sales, strong demand for these types of, you know, properties from a tenant standpoint. And we got a very strong consumer still, right? I mean, we've shared about this a lot in, you know, past episodes where the consumer is actually in a very healthy position. And so these all bode very well for that. So this is really more of a PSA for all those, you know, that are you're still skeptical of retail real estate and something that you definitely need to be paying attention to and think about from an allocation standpoint as we're looking for, you know, the goldmine opportunities, you know, in this current environment. So hope you enjoy this episode and tune in next time for more great insight.

And if you run across an article you want us to comment on, send it over to us.

Absolutely. We love that. I love that we got a lot of submittals from listeners asking different things and we love to respond to those when we can.