Cap Rates, Tenants, & Trends: Insights from ICSC New York With Andy Thelen

(0:09) What is up? (0:09) And welcome back to how to invest in commercial real estate. (0:13) What's going on? (0:14) Best podcast in Jinx, Oklahoma by far, but by far we are screaming towards the new year. (0:21) I feel if there's another podcast in Jinx, we're just openly defaming them.(0:25) I feel bad. (0:26) Yeah. (0:26) Maybe we should.(0:27) We should apologize. (0:28) They should. (0:28) We don't know who they are.(0:30) So, so they can't be that good. (0:32) Yeah. (0:32) Obviously we haven't heard of them.(0:34) So interesting note yesterday, I think it was the 10th straight day the market was down. (0:39) And I thought it was interesting that that has not happened since 1974. (0:44) I didn't know that.(0:45) 10 straight days. (0:47) How old were you in 1974, Brian? (0:49) I was investing in 19... (0:50) I remember that 10 day period. (0:52) Oh yeah.(0:52) I bet you did. (0:53) I bought that dip. (0:55) Yeah.(0:56) You know, it hasn't been... (0:56) Yesterday was bad actually. (0:58) Yesterday was a little bit of a bloodbath, but you know, the other nine days weren't (1:01) just terrible. (1:02) They weren't like thousand point swings or anything.(1:04) But yesterday's news of the feds only cutting a quarter point and signaling they may not (1:11) cut at all next year. (1:12) That was really what drove the market down. (1:15) It was something that the market was not expecting.(1:18) Yeah. (1:18) I think generally the market has been pricing in these decreases a little bit before and (1:24) the market, I mean, S&P has been ticking up every day, almost all year. (1:28) So it's been amazing to see how generally like shitty everyone thinks the economy is, (1:34) but yet the market is doing freaking fantastic.(1:37) So to see a day or a week like we've had is not like completely out of whack. (1:42) It is so interesting and I'm not a political, I'm kind of a centrist, but depending on what (1:48) side of the political aisle you're on, you know, it was the economy which has been terrible (1:54) this whole year. (1:54) Well, no, unemployment has been really low and the stock market has been hitting all (1:58) time highs, but it was terrible in 2024 and then, okay, then everybody's going to start (2:02) admitting to themselves, yeah, this is an awesome economy in 25 depending on if you're a candidate (2:06) one or not.(2:07) But really you've got to look at the data, you've got to look at the fundamentals and (2:11) what metrics are you using to decide if the economy is good and if it's strong. (2:15) It can't just be, you know, what your political party says it is at the given time. (2:19) I just turn on the clicker for the TV and whatever they tell me, I listen.(2:23) That's right. (2:24) That's right. (2:24) That's most people.(2:25) But we are seeing a lot of activity in the market right now, in the commercial real estate (2:29) market. (2:30) Deals are starting to trade. (2:32) I'm getting more emails saying just closed and I think that's a little bit of a combination (2:36) of factors, but one of them I feel like is that sellers are really starting to come to (2:41) their senses with cap rates and we're seeing more and more higher cap rate deals getting (2:45) done and before when the interest rates moved so fast, it took everybody a long time to adjust.(2:52) But now we're seeing everybody kind of settle in and like, okay, this is the normal. (2:56) We're not going to wait for rates to come down a lot. (2:59) We're not going to wait for cap rates to go up too much more.(3:01) We're all settled in and we're starting to do deals. (3:04) Yeah. (3:05) And, you know, I think a big statement that they made is that they're not massively decreasing (3:11) through 27, you know, and that long term projected stability from them at least allows you to (3:18) pencil out a few years for development.(3:19) I mean, most development takes a few years between planning, permitting, building. (3:23) By the time you deliver it, it's a three year deal that you need to plan on an interest (3:28) rate, so to speak. (3:29) So that's really important.(3:30) Anyway, we have our partner on, Andy. (3:34) Andy runs our Fort Worth office. (3:35) He's been on the show many times.(3:38) Thanks for coming on, bro. (3:39) You just got back from ICSC New York. (3:44) Yeah, it was a great show.(3:45) It was nice to be up in New York around Christmas time. (3:48) So nice to talk to everyone in the industry and kind of see what everyone's thinking is (3:53) going to happen in 25 and see where everyone's sentiment is going into the new year. (3:59) Well, give us the AI summary report.(4:03) Retail's hot. A lot of people are finally coming off the sidelines to invest in retail. (4:08) A lot of new funds have been raised.(4:11) A lot of opportunistic funds were raised that never really put out cash because there wasn't (4:14) that much distress. (4:16) I think RCG just finished raising their eighth fund and is about to go on another shopping (4:20) spree of big box centers. (4:23) People are starting to expect more liquidity to start coming into the space.(4:32) A lot of people have a lot of optimism. (4:35) I think the concern that most people have is if there's going to be tariffs and what (4:39) does that do to the cost of new construction? (4:42) What does that do to retailers' prices that they have to carry? (4:46) I think that was the one big kind of more question mark is, are tariffs going to be (4:51) real? And if so, how are they going to impact everything? (4:54) There's been a lot of money coming into the space. (4:58) And that'll be interesting.There's a lot of people that haven't operated retail for (5:01) five, 10 years that want to get back into the space given the low occupancy, given the (5:08) high rent increases and the fact that you can buy this a lot better than multifamily. (5:12) So I think there'll be a lot more money flowing into the space. (5:15) The thought process is that you'll probably start to see cap rates begin to compress Q2, (5:21) Q3 next year as more money comes into it.(5:26) Sellers are finally willing to start selling because they see that they might get a (5:31) bidding war, there might be a lot more money coming in. (5:33) So a lot of optimism, a lot more they think that they can see what 25 looks like, a lot (5:39) more knowing where rates are going to be. (5:43) The question is just going to be is how much liquidity is there truly? (5:48) And what is federal policy going to be for tariffs, which will affect new construction, (5:56) costs of new rents for these new strip centers? (5:59) How can some retailers survive if there is massive tariffs that come in? (6:07) Yeah, yeah, a couple of questions that come to mind, a little comment on tariffs.(6:11) I'm not an expert at all, but I don't see this massive across the board tariffs that were (6:20) talked about pre-election. (6:21) I don't see those getting implemented. (6:24) Maybe it was a campaign rhetoric to get people excited that you're tough on other (6:28) countries, but it just isn't that practical.(6:31) And it's a tax that American people will have to pay because good goods, costs of goods (6:35) will go up. So that's my take on that. (6:38) I did want to ask any new retailers that surprised you with expansion plans for 2025 (6:46) there that you may hadn't heard of or didn't know they were doing so much? (6:51) Now, this show isn't as heavy on retailers as I would say Vegas is, but you probably (6:58) had about 60, 70 retailers that were lined up there looking for new stores.(7:03) Like even Advance Auto Parts, we hear about closing stores, was there looking for new (7:08) stores to open or right size to certain places. (7:10) You've had, I'd say, more discount tenants, laundromats, mailing facilities. (7:17) You know, a lot of your two to four thousand square foot neighborhood tenants were there (7:22) looking for fixes.(7:25) Nice. So did you, so Andy, you mentioned Vegas, so that was, say, nine months ago, the (7:32) general feel of activity, was there a difference just in that period of time or did you (7:39) feel like there's more activity that's that's coming down the pike or what do you (7:42) think? A lot more optimism, a lot more people wanting to get deals. (7:47) You know, all the brokers I met with, hey, I've got these four deals that we're (7:50) probably going to launch in Q1 or Q2.(7:52) And these guys are real sellers. (7:55) And, you know, take a look at these deals that I've got coming. (7:58) I think this fits your criteria and really the benefit of New York.(8:02) It's more of a show geared towards investment sales and landlords versus Vegas, which (8:07) has a lot of leasing. (8:09) So, you know, all these brokers from around the country that are given what we (8:13) purchased this year in Houston and Florissant take us as real, legit buyers, even (8:19) being a younger company, that they're showing us deals that, hey, I'll give you first (8:23) look at this. If you guys are interested, we'll show you this before we take it to (8:26) market.And we're going to start seeing a lot more deal flow of good quality product (8:31) before it gets put on the market, just because our name and our reputation has kind of (8:36) grown this year from what we've been able to do and what many consider to be a pretty (8:39) down market. (8:41) Yeah, I don't know how you three feel, but I felt like people were still cautious nine (8:46) months ago when we were in Vegas. (8:47) Right.And since that time, we've done a lot more deals. (8:50) We're seeing a lot more activity. (8:51) I think 2025 is going to be have a lot more activity than 2024, is my opinion.(8:57) Yeah, I think it was so volatile, you know, everyone kind of pulls back and goes on (9:00) sidelines and watches and waits, you know, and like Joel said, depending on how you're (9:05) looking at the economy and the perspective, what you're worried about, you may want to (9:09) see how those things pan out before you invest a ton of money. (9:13) So I feel it. (9:16) I don't have, you know, a ton of hard data, but I see a ton of new good looking real (9:22) estate that's accurately priced versus the past six, seven months.(9:28) It's been wrong price shit that's been on there all year. (9:31) Right. It's like they're going out with like seven and a half a cap and you call them and it's (9:35) like, yeah, it may close at a 10 and it's still it doesn't pencil.(9:39) So now people are I feel like generally people are right sizing the price a little bit. (9:45) You know, they're pricing to sell. (9:47) They're real.They're you know, the market has generally stabilized. (9:51) People are realistic and know that, you know, going in. (9:55) I mean, what's that now? Seven something.(9:58) Six is the 10, the 10 year, the five year, they're up like half a point in the last couple (10:03) weeks. So and that's a big thing for those last minute closings, you know, year end. (10:10) Like that's a 40 bips.(10:12) That's a big jump. Yeah. (10:13) If you didn't have your rate locked and you've been under contract last month, you've lost (10:19) some return right there.(10:21) I also see other buyers, other competition where we've typically had the the run of the (10:29) mill. You know, we're negotiating a dozen offers at the at a time, not negotiating at (10:34) all. Just now I like my price.(10:37) No, nobody else is bidding. (10:38) We've recently got involved in a couple of really nice centers and there's best and (10:42) finals. We haven't really done a best and final in a year.(10:45) I haven't even heard of that. I saw a deal on price. (10:49) I mean, it's a decent looking Kroger deal and outside of Atlanta, but even just (10:54) unpriced, you know that you haven't seen that in retail in a very long time where (10:59) there's enough buyers out there that are where the market tell you what it is.(11:03) Exactly. Yeah, exactly. (11:04) So I think from that perspective, it's encouraging.(11:07) I know we're still offering and looking at a ton of deals. (11:10) I see deals that make more sense now than they did seven months ago. (11:16) Just again, a little more stable, less less volatility, less, you know, our interest (11:21) rates just going to keep plummeting.(11:23) You know, I think people are underwriting this is like, OK, these these are here to (11:26) stay. We need to figure out a way to live with this. (11:29) And in my opinion, you know, retail occupancy is so high and rents are so low and (11:36) supply has been so slow.(11:38) Like nobody's building new retail centers. (11:39) It's very hard. Rents are very expensive.(11:42) The brand new stuff we're building in Owasso. (11:44) We're getting like 40 dollars per square foot retail rents at any sort of. (11:51) You know, second or third generation retail center that you would see around town, you (11:55) know, that's 80s, 90s, early 2000s rents, maybe 16, 20 dollars a foot.(12:00) So it's like double for new construction. (12:01) And there's not a lot of vacancies in the submarkets where people can go. (12:06) And we're looking at OMS and I'm seeing like 10 dollars per square foot, 12 dollars (12:10) per square foot, 11 dollars per square foot, six dollars per square foot.(12:13) Like you can really jack those rents up. (12:15) So I think that's the perspective is, hey, I'm going in with a little bit of positive (12:20) leverage now, not as much as I'd like, not not not a perfect amount to just have my (12:24) dream cash flow, you know, 12 percent of the LP. (12:27) You're not getting that right now.(12:28) What we're getting is really digging down into the tenants and saying, hey, this (12:33) tenant's been here forever. There's nowhere else for them to go. (12:35) They're definitely not building brand new.(12:36) It's a successful business. (12:38) We need to increase this rent by probably 30 percent. (12:40) And we're having those conversations across the board and aggressively growing the (12:45) NOI practically, not just putting a percentage on it, saying, yeah, we're going to (12:49) get 12 percent rent growth across the board.(12:51) That's insane. It kind of needs to make sense. (12:54) But when you drill down tenant by tenant, a lot of these tenants are really under (12:56) market.Yeah, it's that occupancy that allows you to be aggressive. (13:01) Go ahead. Sorry, Andy.I mean, I think if you look at it, too, I mean, yeah, cap (13:04) rates are high right now, but if there's so much money starting to flood back into (13:09) your retail, are we going to see cap rates start to come back down to three to (13:14) four? Because you've got so much money chasing the same profit and liquidity will (13:19) be the driver of cap rate compression, I think maybe a little bit more than (13:24) interest rates. So I think for us right now, trying to finalize stuff that we're (13:28) supposed to close this year, that's getting pushed into next year and having a (13:32) strong ability to buy Q1, Q2, I think puts us in the best position for our five, (13:39) 10 year hold on what we own, because there's still going to be that higher cap (13:43) rate out there before compression starts to happen with liquidity. (13:47) It may be another Fed cut or two in the back half in 25.(13:51) So it'll be interesting to see what happens. (13:54) But I think where we positioned ourselves with what we bought in 24 and what we're (13:58) under contract now, I think all those assets are going to be really, really good (14:02) deals because we bought them when a lot of people weren't buying. (14:06) Yeah, we made good buys.(14:09) And to Brady's point, trying to find value in the stuff we buy, maybe maybe we're (14:13) buying it close to the same cap rates we did before with higher, with more (14:17) expensive debt. But you're seeing what we've been able to do with some of these (14:21) existing centers in our rent rolls. (14:24) I mean, take the example of the Amarillo deal.(14:26) We took one tenant from $7.40 to $14 and another from $8 to $14. (14:31) So we're seeing real rent growth that is more than you would just model a 10 (14:35) percent growth because we're actually understanding what these sub markets are. (14:39) There's nowhere for tenants to go.(14:41) And we're not trying to screw these tenants out of being able to be successful. (14:45) We're just trying to bring them up to what market is. (14:47) And they've got a consumer base that's already there.(14:50) Yeah, and we'll stair step and market in a reasonable timeline to make sure we have (14:55) successful tenants. The face value of the lease is there for the exit. (14:59) And we don't have to your point, we're buying a similar cap rates.(15:03) We don't have to underwrite a lot of cap rate compression. (15:05) I mean, generally we're underwriting very, very close exits again because of the (15:11) values in the rent growth. (15:13) So that's how I'm looking at deals is seeing like fairly stabilized, maybe, you (15:19) know, 80, 85 plus percent occupied and super cheap rents.(15:25) And I think I think that's what's attractive to me right now. (15:31) And I think the competition is out there. (15:34) I think we're seeing the activity.(15:35) I know we've got several sales that are about to close for the end of the year. (15:38) We've got several assets that are getting offers and getting contracts. (15:42) So that's a testament as well.(15:45) Yeah, 2025 is going to be busy. (15:47) I think it's going to be a great year. (15:48) Hopefully we can grow the portfolio, bring more investors in, get new money and make (15:55) it happen.Yeah. (15:57) Any other key takeaways from ICSE and then we'll wrap it up. (16:02) I think that was it.(16:03) It's a lot of optimism. (16:05) There's a lot of energy. (16:07) There's a lot of money flooding into retail that really hasn't been there for the (16:10) past five, seven years.(16:12) And, you know, we went from being kind of the forgotten asset class to the to the (16:17) shining diamond that everyone wants to invest in. (16:19) So it's kind of interesting how these things turn over time that went from everyone (16:23) wants to be multifamily to now multifamily has got a lot of distress and people are (16:27) trying to put their money into retail because you do have triple nets and good (16:30) basis and less supply. (16:33) So it's interesting.(16:34) It's a. A lot of a lot of optimism, I think it makes everyone really excited for 25 (16:39) and everyone wants to get deals done. (16:41) Yeah, good. (16:43) Well, I appreciate you hopping on the show.(16:45) Thanks, Andy. Everyone else, we will catch you probably after the holidays. (16:49) So Merry, Merry Christmas.(16:50) Happy New Year. (16:51) Before you see me again. (16:52) So and we will see you guys in 2025.(16:54) Yeah. All right. (16:55) Thanks.