Is this a good time to build a retail strip center?
Hi All,

Retail strip centers have been crushed as a commercial investment sector in general but is it a good time to get in and actually build one because the good big-box anchored Class-A strip centers are still selling at very low Cap rates in big cities (Austin, for example). I'm specifically looking at San Antonio Texas to purchase land with Austin market on fire.  Thoughts from commercial investments gurus on here? 

Thank you.
[{"id": "gqqj4xg", "text": "The centers with strong tenants are selling like crazy right now. I\u2019m in and around that market, healthy centers are in high demand.", "replies": [{"id": "gqqm8xa", "text": "Thanks. Yes, it seems the market has a clear split - healthy centers are selling at premium while previously mediocre centers are going by the way side. When you say you are \"in and around that market\" are you refering to strip center market in general or San Antonio/Austin area specifically, just curious.", "replies": [{"id": "gqqn5hb", "text": "Austin/Houston/San Antonio retail", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gqqpad9", "text": "Do you have a commitment secured for a solid anchor tenant?  \nHow much are you going to sink into the project before you have or can get such a commitment?  \nWhat is the value once built if you can't get such a tenant?", "replies": [{"id": "gqqqesa", "text": "Not yet. I'm in the process of short listing the land tracts at this time, possibly shadow to a big box like WalMart, Krogers etc.  So what you are saying is to get a commitment from someone like Starbucks during the land due-dilligence itself before closing on it in case no one wants to commit in which case it may not be worth closing on the land.", "replies": [{"id": "gqqt07k", "text": "Shadow to a big box is good and changes things slightly.\n\nI am saying that you need to manage the risk of the project. The difference between big boxes sitting empty vs big boxes filled with high quality tenants could be the difference between an 8 cap and a 4 cap. If your numbers work at one of those extremes, but not the other, you need to figure out what you can do to make it more likely that it will land at a cap rate that makes your numbers work.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gqr0ej1", "text": "Untrended yield on cost (assuming you get this thing substantially leased up) vs current cap rates. Probably want that spread to be at least 100 bps to pass the initial sniff test.", "replies": [{"id": "gqr2adh", "text": "Thanks. Interesting. I\u2019m not sure if I fully understand the term \u201cuntrended yield\u201d but I get the gist. Let me google and run some numbers. I might come back and have a followup if you don\u2019t mind.", "replies": [{"id": "gqr3cai", "text": "Untrended yield would be the untrended NOI / total project costs. \n\nUntrended NOI is just the industry lingo for the stabilized NOI you expect to generate if the project were built today (ie today\u2019s rent/expenses). \n\nTrended NOI would be the stabilized NOI anticipated at project completion 2-3 years from now, so there would typically be rent/expense growth factored in.\n\nFor both of these, the harder input is typically understanding the cost side of things. So for the untrended calculation you need the complete project costs if building today (land, hard/soft costs, TIs/LCs, etc)", "replies": [{"id": "gqr8ct6", "text": "Thanks a lot. Actually I\u2019ve done the construction calculations, ofcourse with some assumptions on material costs etc. I\u2019ll take your inputs and run the analysis.", "replies": [], "depth": 4}, {"id": "gqrron4", "text": "Well I ran my numbers and it seems I'm able to get atleast a 2% spread assuming 100% occupancy. Thanks.", "replies": [{"id": "gqs2n05", "text": "That seems pretty healthy then and worth exploring further. Good luck on the project!", "replies": [{"id": "gqsxv4j", "text": "Thanks !", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gqr1wwr", "text": "This is the time. Rental rates are still low.  One can often negotiate right now as others have left.", "replies": [], "depth": 1}, {"id": "gqrdxpc", "text": "Yup can confirm Domain rent did not come down at all", "replies": [], "depth": 1}, {"id": "gqrkhzy", "text": "If you have strong tenants committed to long term leases then hell yes. I\u2019ll resell that all day for you, but without the tenants lined up it would not be a risk I would take at the moment.", "replies": [], "depth": 1}, {"id": "gqtb2ke", "text": "Depends on where you are.\n\nMost CRE will be back almost 95% to where it was pre-pandemic by mid 2022.  Exception; some industries that are impacted by online sales are going to have to rethink their strategies, but....that's been true since capitalism and competition began.\n\nSome obvious changes are already afoot: many of the larger retail establishments are redesigning their physical structures via mixing residential above, with retail below (putting the buyers right there above their stores).\n\nIt's not at all new.  Look back to the larger cities in the later 1800's......it's all there.", "replies": [], "depth": 1}, {"id": "gqu00un", "text": "My personal experience dictates class A tenants are building up expansion lists right now but not pulling the trigger.  \n\nI *think* there is about to be a flood of activity in this sector but ya know thats a gamble I suppose.  I am dealing with both trying to buy class A centers and leasing class A in construction and its the same both ways as far as I can tell.  \n\nAnchor is different and I'm not really dealing with that, but your shadow type places seem like your Verizon, att, etc want to soft negotiate a deal and say \"well we love you, lets see what happens in a quarter!\".  Sellers don't want to sell because they think they can close those deals in the next 6 months and drop cap.  I guess we will see what happens.\n\nAlso construction costs are very high right now.  Factor that in.", "replies": [], "depth": 1}, {"id": "gr1mr55", "text": "I would say no.", "replies": [{"id": "gr2tlqm", "text": "Thanks. Is it based on your own recent experience or basically your opinion? Just curious.", "replies": [{"id": "gr556jq", "text": "I'm a retail commercial broker. We have traditional retail sales going online and the service sector like gyms, salons, etc being squeezed by Covaids. Drive thrus and other specific uses will also be in demand, but on a macro level the wind will be against you.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]