Should You Buy Investment Real Estate Where You Shop?

The Cary Towne Center will never be the same. It used to be a mall in Cary, NC, close to Chapel Hill, Raleigh, and Durham. It had 980,000 sq. ft. set on an 87-acre campus but the days of leisure mall shopping have gone away. Once-massive retail chains and department stores are fading into oblivion as more and more of us shop online, get delivery the next day, and stay away from crowds and indoor spaces because of the pandemic.

The Cary property has been sold to Epic Games for use as a global headquarters. The company describes itself as a “leading interactive entertainment company and provider of 3D engine technology. Epic operates Fortnite, one of the world’s largest games with over 350 million accounts and 2.5 billion friend connections.”

“The nature of retailing has long been in flux and as usual that’s bad news for some and good news for others,” said Rick Sharga, Executive Vice President with RealtyTrac, leading source of investor leads and real estate market trends data . “The goal for real estate investors and brokers is to better understand how retailing is changing and to find the new opportunities now being created.”

According to the Raleigh News & Observer, “records filed with Wake County on Dec. 31 indicate the sale price was $95 million. Turnbridge Equities and Denali Partners purchased the 87-acre mall property in February 2019 for $31.5 million.”

The Cary mall has produced a number of winners.

• The property owners were able to sell in 2019 for $31.5 million.
• The 2019 buyers were able to re-sell the property for $95 million.
• Epic Games – a local company – was able to get a new headquarters property at a lower-cost per square foot than it would pay for new construction.
• An opportunity zone is located within about a mile of the mall property. Opportunity zones were created under 2017 Tax Cuts And Jobs Act. They allow investors to obtain special tax benefits – including in some cases the elimination of capital gains taxes altogether — by placing capital gain profits into designated areas. President-elect Biden supports opportunity zones, though with some changes to the program.
• If you own near the mall property you’ve done well. According to Redfin, homes in the 27511 ZIP code where the mall is located were typically priced at $364,500 in December – up 25.7% from a year earlier.

Did the Internet disrupt mall retailing?

The Internet represents an open marketplace where competition and transparency continually drives prices toward zero or as close as possible. Surely the Internet is responsible for mall closures nationwide, right?

Part of the reason for the dead mall phenomena is surely the Internet but to think of it as the only mall slayer does not see quite right. The Internet now accounts for about 15% of retail sales according to the Census Bureau. That’s a big chunk of the retail world but hardly a monopoly. Lots of opportunities for brick-and-mortar outlets remain.

The bigger problems for mall operators concern price and numbers.

Price

Shoppers can readily compare brick-and-mortar prices with Internet outlets. That’s a huge hurdle for brick-and-mortar outlets because their economics and online economics are different.

• Local retailers pay rent while online operators pay for shipping. The rent is always due but shipping only becomes a cost when something is actually ordered.
• Staffing is always required for retail stores but online “shops” have far more flexibility.
• Online outlets can specialize to a degree that does not make sense for local retail outlets and even big box stores.
• Local retailers have little ability to take advantage of distant sales. If you own a pizzeria your market is likely just a few miles in diameter, if you sell pizza supplies online you can market nationwide.

Numbers

But, maybe, the biggest problem overall for brick-and mortar retailers is over-malling. Simply put, we just have too many malls.

Qz.com reported three years ago that “in 2015 – the most recent year with comparable data available – the US had about 23.6 sq ft of retail space per person available, according to estimates from PwC. As the Financial Times reported (paywall), that’s more than twice the amount in Australia, and roughly five times that of the UK and other European countries.”

Jan Kniffen, a retail consultant and former exec with The May Department Stores, told CNBC’s Squawk Box last summer that he “was expecting roughly 33% of America’s malls to go dark by 2030. Now, Kniffen thinks that will happen by next year.”

The reason for the speed-up? The pandemic. We’re just not traveling, socializing, or shopping in person the way we did in 2019.

But some malls are gaining market share even as other malls are closing. “Those that are thriving,” said The Washington Post in November, “are spending millions reinventing themselves as integrated lifestyle hubs — adding yoga studios, medical clinics and microbreweries — populated with more upscale shops. But such targeted investments are often coming at the expense of mall operators’ lower-tier properties — and analysts say the divide between rich malls and poor malls is widening.”

The opportunity for real estate investors

If you want to know something about local real estate trends it can be worthwhile to watch the bigger actors. They have teams of economists, marketers, and real estate specialists to pinpoint the best possible locations.

Consider supermarkets. They’re a neighborhood staple and not easy to replace with electrons and chat rooms. A new study by ATTOM Data Solutions, RealtyTrac’s corporate parent, finds that brands really do make a difference.

“Homes near a Trader Joe’s,” said the ATTOM study, “realized an average 5-year home price appreciation of 35 percent, and homes near a Whole Foods saw an average appreciation of 33 percent, ALDI had a slight advantage at 41 percent.

“However, not only does Trader Joe’s lead the pack for homebuyers in average home value at $644,558, but it also takes the lead in home equity with homeowners earning an average of 37 percent ($255,066) equity, compared to Whole Foods at 33 percent ($191,380) and ALDI at 26 percent ($71,204). The average value for homes near a Whole Foods is $532,224, and $250,850 for homes near an ALDI.”

But what about investors?

“Properties near an ALDI are ripe for investors,” said ATTOM, “with an average gross flipping ROI of 58 percent, compared to properties near a Whole Foods which had an average gross flipping ROI of 36 percent and Trader Joe’s at 30 percent.”

“No investment offers a sure-fire path to profitability nor does past performance guarantee future results,” said Sharga, “but changing retail patterns are worth considering when looking at investment real estate. That local mall now vacant and sad may well have a very bright future both for itself and nearby property owners. Not only that, a neighborhood supermarket may well suggest where attractive real estate opportunities sit in plain sight.”