Revisiting Neighborhood Retail Real Estate feat. Parker Webb
In this episode of the Invest Like a Billionaire podcast, co‑hosts Ben Frazier and Bob Fraser interview Parker Webb, CEO of FTW Investments, to dissect the niche of neighborhood and shadow‑anchored retail centers. Webb explains why these small strip malls—often located next to a grocery or big‑box anchor but without owning the anchor—have shown resilience through COVID‑19 and the 2008 recession, driven by hyper‑local services (haircuts, liquor, tax prep) that e‑commerce cannot replace. They discuss the current market dislocation: property fundamentals (low vacancy, strong rent growth, 6‑% YoY in Kansas City) are robust, yet capital markets still price these assets at high cap rates (7‑9%), creating a buying opportunity. The conversation moves to value‑add strategies that can unlock upside in mom‑and‑pop‑owned centers, such as converting gross leases to triple‑net, improving signage, adding pad‑site leases, creating drive‑throughs, and renovating facades to boost foot traffic. Webb highlights the fragmented ownership (only 3‑5% institutional) as a catalyst for future consolidation and potential cap‑rate compression. The hosts also touch on macro considerations—recession risk, inflation‑driven rent growth, and the slowing of e‑commerce growth relative to brick‑and‑mortar sales—concluding that the asset class offers high cash‑on‑cash returns (8‑9% now, potentially 10‑15% in a few years) with limited downside if purchased at the right price.
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Hello, future billionaires. Welcome back to another exciting episode of the podcast. We have a returning guest, Parker Webb, who is the CEO of FTW Investments, talking again about retail real estate. So this is an absolute—
don't tune out just because he said retail.
Okay.
This is, this is when there's a lot to not like about real estate in today's environment. This is an area you definitely want to pay attention to.
Yeah. So we hit all the big topics. One, what's driving this growth in retail and the sector, what does it look like from an investment standpoint, and how could it potentially perform in a recession. So we talk about all that and more in this episode. Hope you enjoy. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to another episode of Invest Like a Billionaire Podcast. I'm your co-host Ben Frazier, joined by fellow co-host Bob Fraser. And today we have a guest, Parker Webb of FTW Investments, and we wanted to bring Parker back on. We had had him on earlier this year and talking a lot about retail real estate. So this is something we've talked about off and on this whole year and finding opportunities in this asset class. And it's something that is a little bit contrarian, you know, against some of the headline narrative that you may see from time to time of retail is dead, right? But the data is contrary to that.
Yeah.
And so we want to bring you back on because this is something we're still paying attention to. We're still tracking. You're obviously, you know, in the nitty-gritty of this asset class, finding the deals, underwriting them all the time. This is your background, right? And we want to bring you back on, just one, to kind of share again what's going on in retail. You know, why is it still a good place to be looking relative to other asset classes? And they're really looking at, you know, with potential recession looming next year, how does this impact the asset class? So let's kind of start at the beginning for those that maybe didn't hear the first episode. You know, what makes retail real estate attractive right now?
And maybe before we, before he jumps in, you know, tell us your, your background a little bit.
Yeah.
Because you're kind of, you're kind of a retail expert. You've done quite a bit of retail. So yeah.
Yeah, 100%. So, you know, at FTW Investments, we're, we are across really all major property types and invest across the spectrum. But prior to this, the majority of my career I spent in the retail space doing both retail investment sales, retail leasing, as well as working on the private equity side with another group here in Missouri out of St. Louis where we were buying Walmart shadow-anchored shopping centers. And so, you know, a lot of time spent on developing, redeveloping, and really every gamut of the retail side I've been on and largely surrounding around Neighborhood centers shadow anchored, meaning that we are buying a strip center that is adjacent to a big box, but we're not buying the big box. Or it could be a grocery shadow. So we're next to the grocery, but we're not buying the grocery. So a lot of experience across the board there. And I'll say though, those areas that we just talked about are really the areas that have shown to be resilient throughout COVID throughout prior recessions. And the areas that we're interested in the retail space today are really around kind of those same veins, right? So we're talking about unanchored neighborhood centers. We're talking about grocery anchored in some instances. We really like grocery shadow anchored. So grocery's going to drive traffic, drive people, but we don't have to pay for the grocery credit or pay for that cap rate. And sort of the same. So a lot of what we're looking at, again, neighborhood centers, strip centers, and shadow anchored type of property.
So the shadow anchor, just to make it simplify here. So if you're anchored by a grocery store, you're buying a grocery store with a strip mall, your cap rates are lower, meaning your returns are lower because you're paying for this grocery store. What you like is to buy next door to the grocery store. You're not paying the low cap rates the grocery store, you're getting a higher cap rate, higher returns, higher cash-on-cash returns, and you get the traffic of the grocery store without having to pay for the grocery store, correct?
That's exactly right. So we don't have to pay for the grocery store, we don't have to pay for their credit, but their credit is still enhancing the property that's ultimately driving traffic to what we're buying.
Exactly. So you mentioned this soared through COVID, which we kind of covered last time, and it's kind of a shocker, right? And especially the stuff that we're looking at. I mean, obviously, you know, we're not talking, when you think retail, retail's a very big class, right? You're talking about, you know, could be grocery stores, could be Walmart. You're talking about the shadow anchored or the neighborhood center. These are the very small little strip malls that have the nail salon, the dog groomer, the bar, the, you know, those kind of things, right? And they did super well, right? Through COVID. How did they do through the 2008 recession, 2008, 2009?
So mainly this is where, you know, we've seen really over the last 20 years when you look at the data across the board, your large regional malls, your power centers, those that are the large anchored, right? Those were the ones that were the worst affected.
They got creamed, didn't they? Yeah.
They got creamed. Those tenants that were made by these large corporations just couldn't keep up with the e-commerce, couldn't keep up with some of the recessionary stuff. And ultimately at the end of the day, there's just a lot of competition in that space, right? But the stuff that we're talking about is the stuff that has done well, right? Liquor stores that are often in these neighborhood centers perform well regardless of whether or not we're in a recession or not. Those liquor stores still produce sales at a pretty high rate and frankly, often higher during a recession than otherwise. And so, yeah. And so what we've seen is that these are resilient places, right? It's like no matter how bad the economy's going, maybe you go a little bit longer between haircuts or you're still getting haircuts. You're still going, you know, swinging through the liquor store. You're still having meetings at a coffee shop or a bar and all of those places. And so those are the places that, you know, that we really like have been resilient, have shown the data has shown that they are resilient. And they're the places that frankly a lot of us frequent and don't think of it. It's almost like more neighborhood commercial too, because you get this office component to it, right? You get the insurance person, the tax preparer, the attorney, you know, all kinds of different folks that, might fall under more of a typical office type of use, but want that kind of retail orientation and retail approach to their consumer.
And this is hyperlocal, right? I mean, hyperlocal. This is stuff no one's going to drive further than maybe, what, 2 miles or something, you know, to get a haircut or the liquor store. But there's a lot— that's the way you want to go. You want the six-pack, you need to get your haircut. You're just going to go local on the way home. And it's stuff that people do no matter what their pocketbook is saying. So hyperlocal, right?
Hyperlocal. Hyperlocal. And what we've seen, so in the data, what we've seen is like during the, basically the onset of COVID when, you know, the stay-at-home order impacted everybody regardless, right? I mean, that was, that was an impact. So what we saw was about a 17% drop in sales during that initial period when we had basically a full lockdown, right? Which has immediately rebounded and we're now showing at a 13 13% peak, almost 14% peak up above pre-COVID level.
And this is coming out of the neighborhood centers.
Yes, that's correct.
So, so we did see them get impacted, but it really wasn't that deep. And now it's rebounded.
Yeah, exactly. They got impacted. I think it was largely around, you know, it was people not being able to literally, literally not being able to leave their houses. There was a government order of a lockdown. And as soon as that was lifted, people were able to shop and get back to business.
So we're really, the more we look at this, the more we really love this space, especially the small neighborhood centers. We really love it. And it's kind of anti, it's not obvious, I guess, right? I mean, then the cap rates are high, meaning your cash-on-cash returns are high. These things cash flow like crazy. And as opposed to a lot of real estate right now, you know, for example, multifamily is, you know, kind of the, like the gold standard for, commercial real estate because everyone needs a place to live. But the, but on the other hand, the cap rates have just been driven to the floor. They're super expensive, makes places super expensive and cash flows super low. And we're still seeing right now cap rates below debt rates. So, which means leverage is a negative thing. You, you, you know, and so who wants to buy that stuff right now? You know, you still have the recession risk, but boy, is it pricey. On the other hand, I mean, you look in the spectrum of real estate, we love the retail. It's still easy to be bullish on because the cap rates, I mean, we're seeing cap rates, 8, 9% cap rates, meaning cash-on-cash returns, 8 to 9%. That's nuts. That's nuts. I mean, that's a great return and that's apart from appreciation value, right?
100%. I think the other thing too that we have to kind of be aware of there, right? Is like when, when people had looked at, let's talk about market kind of trends prior, right? So, you know, self-storage, right, was largely a mom-and-pop operation. Then multi mobile home parks were largely a mom-and-pop operation, and those have institutionalized over the years, right? Well, today these neighborhood centers are still about 3 to 5% institutionally owned. So we're talking about largely a hugely unsophisticated base. And what that means is a lot of different things. One, you know, we can typically get better cap rates, right? So we're talking about cap rates in the 7 to 9%, but two, because of that level of unsophistication, the fact that a lot of the ownership isn't what we would call professional operators, we have the ability to immediately go in and do things like, you know, there's a lot of room for upside.
Yep.
Lease rates, et cetera. And so we're talking about buying into something that's 7 to 9, that within 2 to 3 years is a cap rate of 10 to 15. And that's really where there's a lot of opportunity.
What have we seen historically with cap rates? Because it's just, it's still a little befuddling to me why this stuff is on sale. It must be super hated. My, here's something that has shown a lot of resilience through various economic times and, you know, and, and I mean, it is pretty boring. Maybe that's why, but why this, why this incredible discount on these? Yeah.
Oh, I mean, let's say shout out to Casey Conaway at the Red Shoe Economist, you know, who also works with CCIM as our chief economist. And you know, what's, it's interesting and I think what, what we're benefiting from as a buyer of this product today is that there's a dislocation between the property market and the capital market. What I mean by that is that the property market's performing high, right? Vacancies are super low in this product, 6%, et cetera. You know, rate, rental rates are increasing rapidly at this type of product, but we're still seeing these high cap rates.
And why?
And there's basically a disconnect between capital markets and the property market. The property market's performing well, but the capital market is still discounting them on price. And why? Well, what they're doing is they're looking at retail data as a macro. And if you look at retail data as a macro or on an average, Right. You see this decline. And but the issue is all that decline happens to be in those subsegments, right? It happens to be regional malls and power centers.
But if you look at the niche of this neighborhood, small neighborhood center, they just kill it. And so just killing the niche, but they're getting painted with the broad brush of retail, global retail.
And which is exactly, it's like if you put, put one foot in a bucket of ice and the other foot in a bucket of boiling water, on average you're about 100 degrees, but your feet are frozen and burning, right?
So I mean, to add to that too, you look at kind of this, this meta narrative of, you know, brick and mortar retail is dead because of e-commerce. And that, that's been the trend for the past 15, 20 years, right? Is e-commerce has been the biggest growth on the whole of the retail sector. But what we're seeing is a slowdown and we saw an initial peak at the beginning of COVID right? But it's, it's kind of normalized as now seeming to plateau and I think one of the more recent stats I've seen that was shared either by Marcus Milchapp or another large firm was that the year-over-year growth in brick and mortar actually eclipsed e-commerce growth for the first time in a while.
Sales growth is actually growing faster in brick and mortar retail?
Retail sales from—
Retail sales than in e-commerce.
On the consumer level.
Yeah.
Interesting.
Yeah, that's correct on a dollar-for-dollar basis. And so web penetration is actually declining, meaning that You know, dollar per dollar of sales, you're actually seeing a change. And we still think, for the record, we're still bullish on the e-commerce growth. We still think e-commerce is going to continue to grow. But even if you extrapolate that out, and even if e-commerce got a majority of the retail sales growth, that doesn't stop from retail sales in the bricks and mortar still from growing something like 6% annually as it's continuing to increase.
So, so I mean, we saw this huge spike in e-commerce through COVID, and so now it's been, it's been going down. But that's really, if you look at the long trend, it's up. So it really depends on what, I'd like to see the data, it really depends what timeframe you look at. I mean, e-commerce is not dead, but it's certainly retrenching back, it's normalizing back to historical patterns. But let's talk about the e-commerce risk of these neighborhood centers, 'cause that's the other thing I love about it. I mean, you're not gonna send your dog to get groomed at Amazon, right? And you know, You're not going to buy your six-pack at Amazon generally. I mean, you know, we're not seeing that. You're not going to get your nails done at Amazon. There's just not a lot of risk. There's a lot of things that can't be e-commerce, right? You can't get your haircut at Amazon. They're probably trying to figure out a way to do that. But exactly, you know, you know, this— it just— those things don't happen. So there's a lot of these hyper-local services that are just going to be done by human beings forever, and there's no e-commerce risk there. And the e-commerce risk that, that there, there, there is has already been done. So it's kind of post-risk, you know? Am I missing something?
No, I think you're spot on. I think where we're, I think the level of disruption that we're gonna see from e-commerce on a go-forward basis is minimal compared to what it was, right?
Yeah.
Um, it's easy to get on and, and buy something online that you're, you know, a book or something like that that you don't need to go to a physical store for, but you can't get a haircut online. You can't get your dog groomed online. You can't, you know, yeah, you can't get your liquor online. All, there's some apps that do that, but often those apps that are doing that, someone's driving to neighboring center, right? So, you know, it's, it's still, I think, fairly resilient to a lot of that. I think, you know, and even where you're seeing the changes happen, it's what's been interesting is even the power centers and such have, have benefited from, you know, this kind of resurgence of the brick and mortar. What we're seeing is people want to, myself included, because I'm 6'3", 250 pounds and I, try on 6 different kinds of clothes to figure out what fits me, right? I don't want to order that stuff online. I want to walk into a store and figure it out. I want to, I'm a size 13 shoe, but sometimes that's a size 12 or 14 depending on the manufacturer. Right. And so we're seeing a lot of that happen where a lot of people are wanting to actually go into a physical location and try that stuff on. So I think retail as a whole is going to continue to grow in person. And I think the other big piece that we're seeing is a lot of this omnichannel stuff that we're seeing is that the retailers need a physical location for returns more than anything else, because that customer service and that return pro— program is a huge component of their entire logistics atmosphere. So while we're still focused on the neighborhood centers, and that's the stuff that we like because it is the most e-commerce resistant, I think even those disrupted by e-commerce are going to see more of a resurgence of sales and activity in their physical locations.
Well, I think it's a great case in point. You know, Amazon, the biggest e-commerce retailer, bought Whole Foods, a brick-and-mortar grocery, right? And that was a key part of their strategy. To kind of be, to have this omnichannel, this hybrid approach, which we're seeing a lot of other bigger e-commerce and, you know, brick and mortar that are kind of having this, this hybrid, right? Where you want to have a brick and mortar presence because you still need that for a lot of things like logistics, like you're saying, but now optimizing to the e-commerce as well. And, and that's kind of almost been like a reversion back to the mean of, you know, the, the, it seems like the sweet spot is, is somewhere in that hybrid.
But Torby Parker is an example of that as well, right? So they were originally a full online retailer and they now have 178 locations, right? And they said, no, we're an online business.
Okay.
I want brand presence and logistics and we're losing money on not being able to do eye exams for all those reasons. They said, we got open source.
Yeah. It's, it's, yeah. So talk about right now, where are we, um, where are we at? You know, as we're kind of, as we're having this conversation, it's, you know, beginning of December, um, going into 2023. And a lot of recession fears, a lot of turbulence in the markets, you know, stock markets down 25% and a lot of fear that, hey, you know, we have high inflation, you know, Fed's having high interest rates. We're seeing maybe some potential slowdown in the economy. How does retail fare through that? Right. We obviously saw a, you know, a recent recession through COVID, but that was pretty unique. But so what's kind of your perspective? What's your thesis on why does retail make sense even in a potential recession scenario?
Yeah, I think, you know, again, it comes back to what it is, right? That the service that they're providing more than anything, right? So we're talking about, and we've seen this, right? So the sales really across neighborhood retail, if you kinda look at the sales, maybe you lose some on some amenities, but liquor might pick up, et cetera. And so sales across the board on neighborhood centers, while we would expect them to be impacted if people have less walking around money, the things that we're talking about are things that they're going to have to do, right? They're going to have to go file their taxes. None of us want to do it. We all got to go do it, right? So these places are still going to get, you know, a clientele to walk through and file their taxes. They're still going to come through and, you know, buy, you know, their, you know, I like to say we drink when we're happy and we drink when we're sad. And usually we're one of those two things. And so we, uh, you know, liquor stores continue to have, have that going. Your, your salons and such, right? It's like, we're all, you know, Maybe we'll let our hair grow a little bit out in COVID, but we're all getting haircuts, right? And even when the market declines again, maybe we're every 6 weeks instead of every 4 weeks, but we're still going to go, we're still going to get haircuts. We still have business conduct. We still have to go be members of society. And so there's certain things that we just have to do. So what we're seeing across the board actually is a lot of activity amongst tenants in the retail space. And so retailers are actually expanding pretty rapidly and we're seeing a lot fewer retractions on square footages and foot freight, foot plates. We're seeing a lot of expansions in terms of more, both the floor plate as well as new store locations. And the, and the first time in a long time, actually since about 1994, we're seeing more stores open than closed. And so we're seeing a lot of activity despite the coming, you know, potential headwinds if there is a recession that we're expecting, right? Despite that, we're seeing folks be more bullish on expanding this piece of their entire distribution network. This piece of their company and making sure that they're being front of mind. The other thing too is even in a recession, regardless of whether or not, you know, again, people have less walking around money, you still need to have brand presence and be, you know, be top of mind. You need to be in a location where people are going to see you and think about you. And so these locations that are incredibly convenient and incredibly visible are going to fare much better than locations that may not be. And you don't really get, you know, unless you're doing a Google search, you're not going to get a whole lot of exposure online. Without paying for a lot of advertising, but someone can always drive by a piece of property and see your sign.
And if we look at, you know, snapshot of today, you mentioned it earlier, you know, vacancy is, you know, very, very low relative to history. And because of that, we're still seeing a strong consumer, right? I mean, we just had Black Friday and it was a lot stronger than expectations, right? And there's been recent reports of a lot of retailers who are ramping up before the holiday season to prepare for what they expect to be a strong consumer. Maybe that kind of slows down a little bit as you go into next year, but if we're looking at right now, there's just not a whole lot of vacancy. There's not a whole lot of available space anyway, and it's one that's driving up lease rates, but it's also a good place to be going into a recession where there isn't going to be already a lot of vacancy out there. Is that accurate?
Yeah, it absolutely is. I mean, you think about it just from the demand standpoint, right? So the couple things that we like to look at, right, to see how the demand for space is, is obviously occupancy or vacancy. We want to look at rental growth. We're going to look at sales growth, whatever. But rental rates, as an example, if you look across retail in Kansas City, so neighborhood centers were about 6% according to CoStar and are projected actually from CoStar's methodology they're projected to have the highest percent year-over-year rental growth of any of the subcategory of retail. Right.
So we're seeing this neighborhood centers, neighborhood centers, neighborhood centers in Kansas City or all neighborhood centers, all neighborhood centers.
Wow. Kansas City, Kansas City projected about 4 or 5 and 4.5, 5%. Neighborhood centers, globe or national nationwide, about 6% and the highest amongst the year, the year forward forecasts in coastal.
6% rent growth is what they're expecting. Wow.
That's correct.
You know, you know, getting back to whether this, you know, how bad is recession going to affect these? And I think it's, I mean, intuitively, you know, you just know people are going to keep buying their six-pack, they're going to keep getting their haircut. But really the killer, the killer thing that you got to think about here is the, is price. Price is king when it comes to making money. If you want to make money, it matters how much you pay.
Right?
For, for getting in. And when you have a cap rate at, let's just say 8%, that means cash on cash, it's yielding 8%. That is a very low-priced asset relative to the income it's producing. And you know, it's just hard to imagine. The only way you lose money if cap rates go up from there, and it's, that's inconceivable. You know, I mean, you know, so it just seems like price is the killer here. It's just so attractive because they're just so darn cheap.
What I think is so interesting too, when you're comparing this to, you know, the big boom and say value-add multifamily, you know, deep, deep value-add or repositioning, right? Where it's, you know, no cash flow or negative cash flow for a period of time. You know, and there's certain times when that risk makes sense, but you're taking a pretty big risk when you're not having cash flow and you go into recession versus having very strong cash flow. And when you have that strong cash flow, you have that low basis, your breakeven occupancy You know, number goes way down, right? Right. So you can sustain actually a pretty high occupancy and still cash flow. And you know, cash flow is king. Even if values go down a little bit in the near term because, you know, demand from an investment standpoint, you know, even decreases further, you still got cash coming in, right?
Right. Right.
Now you're cash flowing at 15%, like you're saying. So it's, you know, it creates a lot of margin and it creates a lot of flexibility when you have, when you have that, that cash.
Yeah. And I also say when it comes to price, right, another piece that we always like to consider is replacement cost, right? For us, it's a huge factor. What would it cost to rebuild this thing? Right? Because if you can get it for a great basis, you know, especially vis-à-vis, you know, whatever the replacement cost is, then it's much more difficult for people to come in and compete with you in a particular submarket. Totally.
That's right.
We're talking about buying things, you know, between say $80 to $140 a foot that would cost $200 to $300 a foot. Wow.
Yeah. And it's, it really is a no-brainer. I mean, you know, to back up the truck on these things, you know, and, and to your, to your point, cash flow too, the, the big problem in recession is, you know, look, if you build your entire life around surviving a recession, you're going to be poor.
Okay.
You've got to plan on growth, right? So, but you've got to be bulletproof enough that if a recession comes, you can weather it. Right. And, you know, to me, the, big macroeconomic 800-pound gorilla is inflation. And inflation is going to continue to raise those rents, and that's going to continue to raise the value of that property. You just have to be able to ride the wave long enough and not, not get blown out because you can't service your debt. That's when people get creamed, is when you overpay, you don't have cash flow, you can't service the debt, and the bank ends up taking the property. As long as you can hold on to the property you can ride the inflation wave and you just got to not be shaken out. And you, you know, so I think investors make a mistake if they're building their entire portfolio around this idea. Let me, you know, let me, let me think about— let me build an entire portfolio around a recession. It's like, no, let's— we don't know what's going to happen, you know, how deep and or how shallow it might be. We just don't know. What we need to do is build a great portfolio at a good price that has a lot of growth and that can weather a recession.
That's absolutely right. I mean, when it comes to anybody's individual portfolio, I mean, this is not financial advice, right? But you know, it comes down to an allocation scheme decision, right? And so, you know, there's certain property types or strategies that in a great time might make 15 to 20% return, but in a bad time might lose 15 to 20%. And there are others in a bad time might make 8%, time might make 18%. So, you know, you gotta look at it from a risk-adjusted basis. My downside's 8, my upside's 18, you know, versus my upside's 20, my downside's negative 20.
There you go.
There's a lot there. And so there, there might be parts of your portfolio where you want to allocate towards something that's going to be a little bit riskier to try to drive some additional yield in your overall portfolio. But you want to make sure that you're doing the right blocking and tackling and filling your property with assets that are going to be able to be resilient and provide cash flow throughout the period that maybe some of your other portfolio properties are struggling.
Yeah, perfect.
You know, I want to go back to a point you made earlier about, you know, the property, the property prior property values versus the property market versus the capital market. And there's a huge inefficiency here, right? And this is, this is what, what creates opportunity, right? Right. You know, Warren Buffett said, if markets were efficient, I would be broke, right? Markets are not efficient. And so anytime there is efficient inefficiencies, that's when you make money. And so what's happening, so these neighborhood centers, they're small, right? Most of these things are, you know, should I say, you know, sub $5 million, you know, and even, you know, $3 million. So these are super tiny. So if you've got a REIT, you've got $1 billion to deploy, you've gotta buy 1,000 of these just to, you know, impact the bottom line slightly. It's a whole lot easier to buy, you know, $100 million apartment complex, Class A or whatever, right? And to get those. So this is not, this is an asset that is too small for the large, the big players, but it's perfect for the smaller investors, right? And I think it's, I mean, it's a great consolidation play to be honest. So just like mobile home parks, same thing. Those were same class, very small, not pricey, very mom-and-pop-oriented, very fragmented market. I think it's a great opportunity. To look for cap rate compression. You know, we don't know when cap rate compression could happen, but if they do become institutionalized, cap rates are going to go down. And if they don't, great, you just cash flow like crazy forever, you know. So it seems like a great investment to play this inefficiency, the capital markets. And we all know anybody who's tried to borrow money, right? It's easy. It's easy to borrow $10 million. It's really hard to borrow $1 million. Really, really hard. No one wants to loan $1 million. No one.
Right.
But 10 million, 100 million, now it's, you're talking, now it's easy. So, so again, the markets are just, just very inefficient at these, at these, these low, low million dollar kind of price points.
Yeah. And like, here's some, some data I think is interesting. So on Kansas City retail, you look across the board from 2010 to today, we've gone from 9.2% vacancy to 4.5% vacancy in the market.
Wow.
It's our vacancy's incredibly low.
Now over what time period?
Since 2010. And if you look at that same time period, you saw cap rates go from 8 for neighborhood retail centers, 8.2 to 7.6. So hardly any cap rate compression despite a much better performing property type. And if you look at it, what's really interesting is, you know, power centers, malls, et cetera, are all trading at much lower cap rates than neighborhood centers, despite the fact that they're performing much worse.
And in spite of the risk, the greater risks. Yep.
The riches are in the niches, right? And that's, this is one of those where we can find that niche that says, hey, all of the data shows that these are doing really well, but people are underpaying for them. Well, let's go underpay for them as well.
Right. Yeah. It's just really an extraordinary opportunity. You know, there's always, there's always a table, the buffet table that's full, right? There's always tables that are empty. You got to know. You gotta know what time it is. And there's, it's always buying season on something, right? And whatever is hated and out of favor, that's when you want to be buying. And cash flow is king. I mean, even if it, if the market doesn't, cap rates don't compress further, great. Let's just, let's just keep putting the money in our pockets.
You know, I think the other point too of this kind of like pre-institutionalization, if you want to call it that, aside from cap rates potentially compressing down the road, it's mostly mom-and-pop operators, right? What you were saying. And so, you know, we're talking about, you know, 7, 8, 9% cap rates, you know, you're purchasing these assets that are likely being run pretty inefficiently, right? And so talk a little bit at, at the property level, the value add, what you do to drive value because it, it doesn't actually take a whole lot compared to, you know, a big redevelopment project and multifamily or conversion from, you know, office to storage or something like that where there's a big capital outlay. And, you know, some, I would say, a larger risk taken to achieve higher rents. You know, what do we see at the property level when you're driving value? What are some of the strategies there to make this more efficient and more professionally run?
Yeah, I think more than anything, you have to know how to cut a deal, right? And so if you're not, you know, professionally in the business of making these negotiations, understanding the marketplace, et cetera, and you've got a property in a particular basis because you're a mom and pop, you put some money in, you did a 1031, whatever. You just aren't cutting deals the way the professional operators are doing. And so what you're doing is you're cutting gross leases. Like we, we walk into shopping centers that have gross leases at $10 a foot, meaning they're not paying anything additional over their rent for taxes, insurance, for common area maintenance. When the market's like—
So the landlord's paying all those things. Landlord's paying all that. Gotcha.
So they might be making net $5 a foot on that tenant, even though the market's 15 to 20 triple net, meaning that tenant's actually paying $20 to $25. So immediately you've got an opportunity to go in there and double revenue on a particular tenant. And sometimes you have to say, hey, we're going to lose this tenant because they were not a good fit for the shopping center. Striking a bad deal isn't a good reason to keep them here. Right? And so immediately what you can do is go in and cut those deals, you know, find ways to do that. And how you end up being able to retain those tenants is you do things to make the property better. You make sure the lighting is better, the asphalt's better, the concrete's better, paint, I mean, there's simple things to make these things more attractive and to bring them into the 21st century in terms of their makeup that aren't incredibly expensive to the property that add a whole lot of value. And when you add all that value, you make the shopping center more appealing, look safer and more desirable to go into and sometimes easier to park or find, like with signage. Well, now you're going to drive more sales, right? And so our goal when we own these properties is to make sure that we're putting the property in the best position to drive the most sales for our tenants. Because the more sales they can get, the more they can pay in rent. And so that's kind of where it's, it's a mutually beneficial relationship for us to make that property look and feel as best as it can so they can be the most successful in their businesses and then ultimately provide us the money.
Right. Because ultimately if you're driving more, more foot traffic, more car traffic to the center worth more, that's driving more revenue to those tenants and driving more revenue to, to the owner. So, It makes a lot of sense. I love to, I think we talked about this in the last episode we did, but some of these kind of ancillary strategies, you can't do this every time, but right, if you have a big parking lot, for example, and you have some extra space and you can go, you know, carve out a land lease or, you know, sell off a parcel and get a Scooter's Coffee or some kind of small footprint retailer, coffee shop, whatever. I mean, you've done this before on a project, right? And you basically, You know, sold off this piece of land to another tenant and they built kind of a freestanding building and you pretty much were able to recapitalize all the equity in the deal just from selling off that piece, right? I mean, talk a little bit about some of these kind of unique strategies when you're looking for opportunity and driving more value.
Obviously there's the easy ones, the rent and the, you know, making sure that you're getting collections on that stuff on the tax insurance camp. Then you have other things, maybe signage, right? So sometimes you can charge for signage. Some markets will let you do that. Sometimes you can put billboard signage up. There are other things like that that you can do, but pad site sales is a huge option or pad site leases. And so what you're referring to is, you know, we had a project where we went in and had an old QSR pad site that was really dated with a tenant in it. We were able to negotiate to move that tenant in line. And this is a property we paid 2.7 for, had about $450,000 in equity in the deal. And then once we were able to get that tenant out of that and had a for use. We put a plan together where we were actually building out a pad site there. But a group came to us and wanted to put a new financial institution on that site, paid us $750,000 for something where we had $450,000 in the whole site. So we were able to take not only our money off the table, but make another $350,000 and still own the shopping center. So we ended up plugging some of that money back into some renovations and taking some off the table. But that's a great strategy to be able to use. And there's lots of different ways you could do that. Sometimes depending on where you are and if it makes sense, there's ATMs, you know, there's, you know, ice and water and there's other items that you can think about is how do we make use of what might be dead space or if we're overparked or something like that, how do we make use of that space and monetize it?
You know, I'm thinking about a little strip mall that's in my neighborhood that I've suddenly started going to and it was kind of a real old dated, I don't know, it's probably, you know, made in the '70s or something. And, and they went and added patios. There's a bunch of restaurants and bars there and patios. They did the parking lot, they added some facade work, and it's just really nice. It's appealing, right? And during the same— that whole— this whole period, malls have become dead. No one wants to go to— I can't remember the last time I went to a mall. Who wants to go to a mall? You know, but, but so, but the neighborhood centers have been able to reinvent themselves. And I don't know how expensive that kind of thing is, but, uh, it's really, I mean, it's just packed now with these, you know, nice kind of, you know, you know, I guess hip little restaurants and, you know, outdoor seating that's just very appealing. You know, just talk about that and the kind of the consumer trends and, and are we seeing, you know, these kind of things, you know, neighborhood centers just gain appeal relative to some of the old form factors?
Yeah. I mean, one of, one of the biggest things that we're seeing is, you know, there's obviously a trend towards renovation. I mean, a lot of these strip centers, were built a long time ago. As I mentioned, when we're talking about buying something for 80 to 140 bucks a foot vis-à-vis costing 200-something plus to build these things, we're not seeing new building. I mean, we're just not, there's almost no new construction of retail today. It's far cheaper to find something that's defunct and redevelop that site than it is to do something. So we're seeing improving supply or, you know, or right. So we either see declining or almost no increases in supply. We're seeing improving occupancies down, you know, from 9 to 4.5%. Wow. Right? So positive demand against stagnant or declining supply is really strong. And so where we're seeing people, you know, move from one location to another or find different spots is, you know, access and visibility are huge. The signage is obviously huge. Making sure that you have some sort of more of a contemporary architectural design, right? If it looks old and dated, it's just not going to feel something like something that's attractive. But if it looks nice and new, I don't care who you are. I mean, like, all I can think about is, more than anything else, and this is kind of one of my guiding philosophies on design, it's like, my wife, when she's running around with our kids, where is she going to want to stop and get a cup of coffee or have an ice cream or do something? And it's like, where is she going to feel comfortable and safe? And what does that place need to look like? It's going to make her safe. That's a spot that I should, I should go into, right? Because my wife is pretty discerning if it's going to meet her criteria. right, then it's gonna meet a lot of people's criteria. And you design for your most specific, you don't design a handle for an average hand. You design it for a really weak hand because then people who have weak hands can use it and everybody else can too. And the same thing here, we design for who's gonna be our most, you know, discerning clientele and how do we make sure this is a place that they're gonna come by making sure that it's well lit, safe, that it's clean, um, and that it's easy to get in and out. From there, we look at some additional trends that we're seeing and things that we're seeing come up. I mean, drive-throughs are a huge need today. There are fewer drive-throughs than we need to support places. And so we're seeing opportunities even in retail strip centers where you can take an end cap, add a drive-through, interesting, wrap around traffic, and that drives huge value. And you might be able to get 20 to 40% more rent in a space if you can accommodate a drive-through on that. So that's, That's one thing that we look at if we can accommodate that. But so drive-throughs are a huge component of what the tenants are demanding. And then I'd say as well, I mean, your average tenant is looking for something that's, I would say probably for these shopping centers, 2,000 to 4,000 square feet on average is what we're talking about. And so one of the ways that we're able to drive value and make spaces easier is if we have spaces that are 500 square feet, 900 square feet, 1,200 square feet, or they're 10,000 square feet. You gotta find ways to make those spaces meet the consumer demand so we can demise those spaces. We can blow out demising walls, et cetera, to make spaces easier. No matter who you are or what you're doing, we find that it's really difficult for people to see what something's going to look like when it's done. So if you can go in there and spend a little bit of that time, energy, effort, and capital to get the end result, you know, you know, this group's wanting 2,000 feet. You have two 1,000 square foot spaces next to each other, blow out the wall so they can see it. Put even a white coat of paint on the wall so they can see what it looks like open and drop some lighting in there to show it. You have to think about kind of merchandising the space like a retailer does to its clientele. We have to merchandise space to the retailer to make sure that space is appealing to them and easy for them to want to be there.
Parker, thanks so much for coming on again and sharing these insights. Definitely something we wanted to kind of let our listeners hear again and just talk through what this asset class looks like. Appreciate all this.
Love the space. Love the idea. When there's a lot of areas of real estate that I'm not excited about, this one just continues to say, buy me. Absolutely.
We agree.
Awesome. Well, thanks so much, Parker.
Thank you guys. Thank you very much.
