We are a fund that has invested in a number of asset classes, but never retail. We were recently approached by a group that was seeking an LP investor in a ground-up construction retail project. We have never seriously considered retail because we assumed that e-commerce and other factors have been crippling for retail. Are we wrong in our assumptions? What would a good retail deal look like?
Many people see retail as a disrupter, which can bring about opportunities now. There is no way I would consider retail without having an expert aboard my team. So many properties are being converted to medical office buildings, small hospital units, entertainment centers, we work type uses and different presentations of retail. It depends on the market.
Retail is always about the tenants and the location long term (for the underlying land value).
Retail with large restaurant and/or entertainment venues would be less subject to e-commerce threats. Likewise, home improvement centers, groceries and the like. Also, consider a hybrid return scenario, whereby your return is largely fixed, but the GP has a higher upside along with more risk.
There are many good "final mile"-type retail shops out there, and we even have seen Amazon's purchase of WholeFoods as a step back toward the consumer. Look for opportunities that make a clear statement about why the brick-and-mortar location will remain relevant.
I get this question all the time from people looking to invest in the U.S. Retail is a not a high-yield investment. Retail requires rent, which is a drag on earnings that e-commerce doesn't have. Also, think about the insurance, taxes, etc. Retail requires labor. The cost of labor, possible health insurance, workman's comp and payroll processing is only going up. It's a drag on earnings. Retail requires traffic. There are limited amounts of prime real estate and, even if you did find such a spot, it would be expensive. Retail is more seasonal than e-commerce. When it snows, customer count is down. When it's sunny, customer count goes down. When it rains... A good retail deal would be where you owned the land, you saw projection that showed an increasing urban density of a younger population that had spendable income, and had other magnets for customers, like entertainment and restaurants.
Other than the obvious rise of distribution and last-mile facilities supporting online retailing, the best parts of retail real estate seem to be the best located in large regional shopping centers. For urban retail, it's in the best location in urban centers or near transportation hubs. Grocery-anchored shopping centers, if good and with vibrant shopping, should always be needed as long as there are barriers for competition to enter in the area. Most others are challenged.
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