Price Check for Centers
Here’s something you may not have heard in a while: Competition from multiple buyers is causing a spike in the price of many shopping centers. This isn’t a minor bubble, either — it has become apparent to me that the extremely competitive nature of the current market has led to some dramatic overpricing. From my perspective, many of the price tags on power centers and grocery-anchored neighborhood centers (and, to a lesser extent, traditional malls and unanchored strip centers) are getting out of touch with reality.
This point was driven home to be recently by an experience I had when performing some due diligence research on behalf of a client interested in investing in a major distressed power center. After looking closer at the property, the tenants, the market and the financials, I ultimately advised the client in no uncertain terms to stay away. I believe the phrase I used was “I wouldn’t touch that with a ten-foot pole.” To my disbelief, I later discovered that the property had 17 competitive bids! In this case, the center is a distressed asset that was built before its time — developed in anticipation of population growth that never materialized. This demographic reality shows no sign of changing anytime soon.
So what’s going on here, exactly? I’m sure that part of it is that there are plenty of prospective buyers out there, including REITs, pension funds, insurance companies and developers. And, with a recovering economy, there is a significant amount of investor money sitting on the sidelines. Mostly, however, it’s a case of a lack of product: there are simply fewer opportunities to invest in new development because there is no new development. At least, new development has slowed considerably in the past few years. The result is that prices for many properties are inflated at the moment.
Also, the success of some redevelopment initiatives has investors assuming that many less-than-desirable centers will be redeveloped or rehabilitated. The reality is quite different, however. Yes, there are high-quality redevelopment opportunities out there, but not every center is a candidate for redevelopment. You still need the basic ingredients for retail success, and not all of those can be controlled. You can shuffle the tenant mix and invest in significant upgrades and new construction, but if the market isn’t there, you are still going to be paddling against the current.
With all of this money out there and no one quite knowing where to put it, the net result is that everyone is chasing the same kind of asset: neighborhood grocery-anchored centers and power centers where investors and developers believe they can add value. The supermarket-anchored neighborhood centers seem like the most active category, with generally the most intense competition over the center(s) in each market with the strongest supermarket brand (either the best sales volumes in the region or the top market share). Power centers, however, are the category of commercial asset where I find the inflated prices to be the most puzzling. There simply are not very many new tenants appearing in this category (with a few exceptions like Sprouts and Total Wine) and, because there are so many current vacancies, the prices are lower.
If I were putting my money down, today, I would try and think very carefully about two things: 1) where I could add the most value, and, 2) where the prices are more realistic. There is nothing earth-shattering about that, of course, it simply goes back to investment basics. Realistic prices are a little difficult to find, these days, however. Maybe the best approach in the current environment would be to focus somewhere where most of the REITs are not looking: the anchorless strip centers. They may not be the “sexiest” of investments, but they make great money if they are positioned correctly, with popular fast-casual and quick serve restaurants as well as professional services such as some of the new massage, chiropractic and medical/dental concepts out there. It’s a much better position than overpaying for one of the other categories.
From a retailer perspective, I’d be a little bit worried that landlords might be asking rents that are beyond what’s affordable. Especially because many retailers are still out there looking for deals, we are starting to see a disconnect between what investors are expecting and what kind of rents retailers are willing to pay. This will be worth watching closely over the next year or two.
The bottom line is this: There is disproportionate investment interest in many commercial development categories at the moment, especially relative to the earning power of those assets. Is that a blip on the radar screen or a trend that will persist going forward? I’d love to hear your thoughts and personal experiences: Is the market out of alignment? If so, what kinds of developments are seeing the highest price spikes? Join the conversation by leaving your comments below or emailing me at [email protected].
Click here for past columns by Jeff Green.
Walgreens opens net-zero energy retail store
Sporting two wind turbines, nearly 850 solar panels and a geothermal system burrowed 550 ft. into the ground, Walgreens celebrated the official opening of what the retailer believes to be the nation’s first net-zero energy retail store, anticipated to produce energy equal to or greater than it consumes.
“As we celebrate the grand opening, we begin a one-year effort to operate a retail store that will generate more energy than it consumes," said Mark Wagner, Walgreens president of operations and community management. "Using the best technologies available, we believe we can accomplish our goal of having the first net zero energy retail store in America,” he said. “Currently, we have facilities that utilize wind turbines, solar installations and geothermal technologies. This is the first time we are bringing all three of these technologies, and many more, together in one place. Our purpose as a company is to help people get, stay and live well, and that includes making our planet more livable by conserving resources and reducing pollution.”
Illinois Governor Pat Quinn said, “I am proud that an Illinois-based corporation like Walgreens is taking the lead in the use of green technology, which will be a model for all retail operations across the country. The best energy sources are free, renewable and have little environmental impact — and that’s exactly what Walgreens is doing in Evanston.”
Walgreens plans to generate electricity and reduce its energy usage in the store by more than 50% through several technologies, including:
- Nearly 850 rooftop solar panels, generating enough energy to power 30 Illinois homes for a year;
- Two 35-ft.-tall wind turbines, using Lake Michigan breezes to generate enough power to offset annual greenhouse gas emissions from 2.2 passenger vehicles;
- Geothermal energy obtained by drilling 550 feet into the ground below the store, where temperatures are more constant and can be tapped to heat or cool the store in winter and summer;
- LED lighting and daylight harvesting;
- Carbon dioxide refrigerant for heating, cooling and refrigeration equipment; and
- Energy efficient building materials.
Engineering estimates — which can vary due to such factors as weather, store operations and systems performance — indicate that the store will use 200,000 kilowatt hours per year of electricity, while generating 220,000 kilowatt hours per year.
“We are investing in a net-zero energy store so we can bring what we learn to our other stores and share what we learn with other companies," said Thomas Connolly, Walgreens VP facilities development. "Because we operate more than 8,000 stores, anything we do that reduces our carbon footprint can have a broad, positive impact on the nation’s environment.”
The store is seeking platinum certification through the U.S. Green Building Council LEED program, Net Zero Certification through the Living Building Challenge and has received GreenChill platinum certification through the U.S. EPA. GreenChill’s Store Certification Program was designed for supermarkets. This is the first time a GreenChill certification is being awarded to a small-format store, such as a convenience store or pharmacy.
The project is the latest of many green initiatives for the company. Walgreens currently operates two stores that have achieved a LEED certification level of gold; 150 stores utilizing solar power; a store in Oak Park, Ill., using geothermal energy; a distribution center in Waxahachie, Texas, that generates energy though the use of wind; and 400 locations with electric vehicle charging stations. Walgreens stores use 25 watt fluorescent lamps (lowest wattage in the industry), LED cooler and freezer lighting and energy management systems in more than 5,000 locations. In addition, 15 Walgreens distribution centers have achieved net zero waste, which means revenues from recycling exceed waste expense.
The Evanston location also showcases the new Walgreens “Well Experience” store format with features that include an enhanced, state-of-the-art pharmacy designed to encourage greater interaction between pharmacists and patients.
Changing of the guard at Coty’s OPI brand
Leading global beauty company Coty has announced that OPI founder and CEO George Schaeffer plans to retire. Schaeffer will continue to work with OPI’s management team through a newly created role as OPI’s strategic board adviser.
Schaeffer founded OPI in 1981 and has grown the brand’s portfolio of shades to more than 400. After more than 30 years of leading OPI, Schaeffer will focus on the Schaeffer Family Foundation and multiple charities that support health-related causes and children’s education.
"George puts his heart into everything that he does: the OPI business, the professional nail care industry and his philanthropy," said Michele Scannavini, CEO, Coty. "I would like to thank George for his commitment over the years and wish him continued success in the future."
"George is a visionary leader and entrepreneur," said Renato Semerari, president, Coty Beauty. "I am very thankful for his leadership in making OPI such an iconic brand and for his help in making OPI become an integral part of the Coty family. I’m extremely pleased that he will remain involved in OPI’s future."
"The OPI brand is my baby, which I have loved and nurtured for many years, and will continue to do so," added Schaeffer. "I look forward to working together with Mary and Suzi and expanding OPI’s presence worldwide."
To move the brand forward and lead its international expansion, Coty has appointed Mary van Praag to GM of OPI. Van Praag will begin her new role on Jan. 1, 2014, replacing John Heffner, who, according to the company, has left the organization to “pursue other career interests.”
Van Praag led Coty’s mass channel sales organization in the U.S. for three years, after which she was promoted to her current role managing Coty’s business in Canada.
"Mary’s strong business acumen, category knowledge and diverse work experience will be key assets in expanding the OPI brand business internationally," said Semerari. "She has been a star performer within the organization for many years and I’m confident that there is no candidate more qualified than Mary for this important role."
"I’m deeply honored that Coty’s leadership has chosen me to oversee the OPI brand, especially during this crucial time in the brand’s history," said van Praag . "I’m eager to start my new role and working with George and Suzi to propel the OPI brand toward new levels of growth."
Van Praag is a graduate of Miami University where she earned a bachelor of science in business with a major in marketing. She also completed an Executive management program in general management at Harvard Business School.