IRVINE, CA—As retail continues to reinvent itself, the sector is a proving a challenge for even the most experienced investor. As senior managing director Nicholas Coo of Faris Lee Investments sees it, a careful and creative approach that considers each individual property—will provide buyers and sellers with the highest best use to maximize value in the current environment. GlobeSt.com talked with Coo to get his strategy for successful retail investing.
GlobeSt.com: As a retail-specialized firm that focuses exclusively on property sales, how has your marketing model changed over the past 12 to 24 months?
Nicholas Coo: The borders of underwriting have expanded, requiring us to look outside retail in certain cases in order to make the best recommendation for our client.
For buyers, we have shifted our underwriting to speak to current market conditions, largely driven on determining whether the highest and best use will continue to be retail or if it should cycle into another use. It requires that we understand several elements not often considered, including a possible re-entitlement process, the economics of rebuilding or modifying, and re-development programs which consider a yield on cost versus being based in “in-place” income.
For sellers, we are emphasizing real estate fundamentals rather than focusing on tenant brands and existing income stream alone, when making valuation conclusions. We are providing marketing strategies and giving strategic hold versus sell advice. In past years, capitalizing the existing income was a market standard. Given the current market conditions, we believe the best practice is to look deeper into each asset including STNL property, in order to consider risks – and more importantly – tap each asset’s maximum potential value. Examples of this include providing detailed business plans as part of our valuation conclusions and marketing process. Specifically, this means looking into the investor’s business and proposing a plan backed with detail. A large portion of our assignments now include financial modeling, which considers re-use or redevelopment returns on cost.
GlobeSt.com Please describe the process you take for typical retail buyers that are now looking outside of this asset class.
Coo: We start with the investor’s goals and objectives which define their “good deal.” However, the biggest distinction would be understanding where yields are within other product types, the risks, and how the cash flow behaves within other product categories. This allows our firm to make thoughtful comparisons and position our offerings intelligently. We have realized that our platform is not just a retail-specialized model, our marketing process offers best-in-class execution for net leased office and industrial due to the marketing channels we speak to which are used to seeing pricing over $400 psf. Positioned within our offerings, these particular product types have had success due to the perceived value relative to traditional retail pricing.
GlobeSt.com: Can you provide a couple examples of how you have provided a new vision for a retail center?
Coo: We recently closed a retail center in Palm Springs with almost 50 percent vacancy. The vacant portion of the center had been that way for ten years. Our marketing plan proposed office uses, gym uses, as well as traditional retail backed by modeling which considered yield on development cost. This was a tall task considering the duration of the vacancy.
Currently, we are advising a seller on an Inland Empire asset which will involve a new parcel map and reconfiguration of space, which could provide as much as a 30 percent increase in value versus underwriting the existing income alone.
GlobeSt.com: What else should readers know about Faris Lee’s evolution as a retail-specialized brokerage firm?
Coo: We are constantly evolving in order to speak to the market in a way that addresses the changing opportunities and risks that present themselves. Salesmanship and marketing comprise only one part. Understanding the economics and providing a well thought out plan allows us to take a position where we are able to dictate pricing versus relying solely on current comps or traditional metrics.
Ultimately, the market speaks and the feedback is relevant, but every marketing campaign is an opportunity to add value beyond a given asset’s current configuration or economics.
Visit Faris Lee Investments at ICSC Western at Booth #1103. www.farislee.com