Top of Mind: The Curious Case of Retail Real Estate

Marcus & Millichap Article – https://www.globest.com/2023/08/31/if-retail-is-flourishing-why-are-there-no-large-deals/
FRED Retail Sales: Retail Trade and Food Services – https://fred.stlouisfed.org/series/MRTSSM44X72USS

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Transcription

Ben Fraser: Welcome back to the Invest Like a Billionaire podcast. We’ve got another top of mind episode for you today. If you’re new to the podcast, these are shorter podcasts where we’re reacting and talking about different articles that we recently read, headlines we’ve seen in the news, and really just trying to make sense of what’s going on in the economy for our listeners, there’s a lot of nuance here.

It’s important to have the right framework. When you’re looking at the data, and so today we’re gonna be talking about retail real estate. We talked about this a few weeks back on another top of mind. And there’s a reason, there’s a reason we’re talking about this because we see a lot of opportunity and we’re not seeing a lot of people talk about it, which is really interesting.

But the data does not lie. And again, we’ve talked about this before in other podcasts. Invest like a billionaire, right? That’s our name. And to do that a lot of times requires contrarian investing. You have to do things that are different from the crowd. You have to invest differently than other people in the herd.

Mentalities investing and looking for the opportunities. Look for the areas where there’s a disconnect between price. Value. The value and the fundamentals. Bob, share the article. You were reading the other day. 

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Bob Fraser: So the article was a report by Marcus Millichap, who is a big broker in the retail space.

And they’re, they made a couple points and this article, and it’s, it’s, the points were basically why is in this hottest market called retail, why is there no deals going on? And. So it’s just such a good article. But they said they made a couple points first they said there’s been virtually no new development in retail shopping, okay.

Really in the last 15 years. And at the same time, vacancy rates continue to decline. So we’re seeing vacancy rates going to almost nil. In fact, on the properties we own, we actually have zero vacancy and At the same time, you’re seeing rents going up, which of course when you have zero vacancy, rents are going up.

So we’re seeing all these three things happening, and yet no deals are happening. And for those of you that know commercial real estate, cap rates we’re seeing are in the nine point a half percent range for non grocery anchored retail, which is our favorite category. And that’s insane.

That means if you paid cash, you’re earning a 9.5% return. That’s what that means. And of course, leveraged up while your returns are really way higher than that. And so it’s nutty what’s going on? Why are there no deals? And they’re making a point that I. You know that a lot of people are taking a wait and see, and it’s typical what we see and investors are very slow to, to pay attention to this.

They’re waiting for the big recession to fall. But let me show you a chart here. I’ll show you the recession, right? And here’s a chart. This is from my friend Fred. Fred is a member of the Federal Reserve of St. Louis Federal Reserve. And they love data, like I love data.

And what this is retail sales, retail trade, and food services. And I wanna show you, this is since the nineties, so I want you to see this chart is just going up into the right, great financial crisis. Take a little break and then go up again, and then you get covid and it drops off a cliff. Then immediately jumps right back on top of the clef and then doubles.

It’s increased, so it was already increasing at an incredible rate, and then jumped 30% from covid. Wow. Retail sales are on fire. And so the reality is, there’s no recession in retail. And if you’ve gone shopping recently, you’ve gone to an airport recently.

They are jammed and the consumer is healthy now. I’ve got people banging on me because they’re saying the consumer’s not healthy. The lower quartile is the suffering of consumers, but the other three quartiles are not. You’re seeing wages up, you’re seeing stimulus money having benefited, and you’re, and people are spending like there’s no tomorrow.

And then the point is, so again, I think we’ve made this point before, but I’ll make it again because it’s worthy of saying, people are afraid of malls, they’re afraid of re retail in the sense of, big box retail because of the e-commerce risk. Hey, that’s not what we’re talking about.

Even the grocery was anchored. I think you pay a lot more when something’s grocery anchored. It’s much more expensive, but we think the grocery anchors are not worth it because they’re, grocery can be, has a lot of e-commerce risk on it. But the stuff that’s non grocery anchored is incredibly good priced right now, well priced because.

These things, this is your nail salon, your dog groomer, your hair salon, your liquor store, your neighborhood restaurant, and these things are all booming with services that cannot be replaced on e-commerce. And with Covid, everybody’s closer to home. And now people are working from home.

They just are using more services that are related to their home. So we just can’t get enough of this retail. And it’s a classic example of a disconnect between investor fears and true opportunity. These numbers don’t lie. We’re seeing retail on fire. But everybody’s afraid of the narrative and so can anyone say buying opportunity?

Let’s buy this stuff on sale. 

Ben Fraser: Yeah, and you made amazing points here, and there’s really a lot of drivers to value here. Obviously retail sales is probably the biggest, but one that you talked about earlier that I think is equally as important is there hasn’t been a lot of new construction of retail, right?

And You have to look at the replacement cost of some of these strip centers is so much higher than what you can buy them at right now. It’s almost double. It’s almost double that. It is almost double. And so we’ve seen this when we were in the single family space and still operating that space, 10 years ago.

And we saw this same thing happen, right? There is not as much supply and the replacement cost for the housing was so much lower than what you’re buying. Inevitably, prices have to, over time, trade up to those levels. 

Bob Fraser: Exactly. If there’s any kind of growth at all, prices have to go to replacement cost.

It’s just a matter of time, and that’s what we’re seeing in retail. Yep. 

Ben Fraser: So hope you enjoyed this little episode. This is a one hitter on the retail and it’s obviously an asset class we’re paying a lot of attention to. Very excited about it, and I think there’s a lot of opportunity. So tune in next time and please, subscribe, leave a review.

We always appreciate it and obviously love when you guys reach out to us. You can reach out to us on the billionaire podcast.com and there’s an ask Anything button you can click there. Send us the articles you’re reading, send us the things you’re curious about and we may talk about an episode. Thanks so much for listening.