LOS
ANGELES, March 28, 2024 /PRNewswire/ -- Cove
Capital Investments reviews and analyzes nearly every type of asset
class available for Delaware Statutory Trust investors.
This list of potential DST property asset classes includes
government leased buildings, self-storage facilities, multifamily
apartments, medical buildings, fast food buildings, pharmacies,
distribution facilities, shopping centers and more.
However, Cove Capital Investments believes that within today's
business and capital markets landscape, interest rate environment,
and macroeconomic trends, there is an asset class with
opportunistic potential that is being overlooked by many investors:
multi-tenant retail.
Make sure to watch this video of Dwight
Kay explaining exactly why Cove Capital Investments believes
there is opportunistic value for investors in multi-tenant retail
DST properties.
What is the Multi-Tenant Retail Asset Class?
Before we get into why we believe that multi-tenant retail could
be a good investment for DST 1031 investors, let's first review
just what is a multi-tenant retail property.
Multi-tenant retail as a real estate asset class refers to
commercial properties that have multiple retail tenants within a
single complex. In essence, it's a type of retail property where
there are several distinct retail spaces leased out to various
businesses under one ownership or management structure. These
spaces can range from small centers with just a few independent
tenants to large retail centers from where numerous national retail
brands operate.
Potential Advantages of Investing in the Multi-Tenant Retail
Asset Class:
- Diversified Income Stream Potential*:
One of
the primary advantages of investing in multi-tenant retail
properties is the potential for a diversified income stream. With
multiple tenants, the investor is not solely relying on the success
of a single business or tenant. Even if one tenant experiences a
downturn, the income from other tenants can potentially help offset
the impact.
* Diversification does not guarantee protection from losses or
guarantee returns.
- Reduced Catastrophic Vacancy and Lease Expiration Event
Risk:
Multi-tenant retail properties generally have
lower catastrophic vacancy and lease expiration event risk compared
to single-tenant properties. If one tenant leaves, the remaining
tenants continue to generate income potential while a new tenant is
sought. This reduces the impact of vacancies and lease expirations
on cash flow potential and allows for a smoother transition.
In a single-tenant property if the tenant leaves, become
insolvent/bankrupt or "goes dark", 100% of the income potential and
rent is impacted creating a potentially catastrophic event.
- Increased Tenant Stability Potential:
The
presence of multiple tenants can provide greater stability
possibilities to the property. Established retail centers often
attract reputable tenants with longer term leases, which reduces
potential risk. Additionally, the synergy created by having
complementary businesses operating in proximity can enhance
customer foot traffic and increase the likelihood of tenant
retention prospects.
- Potential for Higher Returns*:
Multi-tenant
retail properties can offer attractive potential cash flows on
investment. With multiple possible income sources and staggered
lease expirations, investors can generate the potential for income
and appreciation over time. Well-located and well-managed retail
centers can experience consistent demand, leading to the
possibility of increased property values and rental rates.
* Returns are never guaranteed in DST 1031 properties and other
types of real estate investments. Please read the full
Private Placement Memorandum to understand the risks of investing
in a DST investment.
- Meaningful Income Potential:
Oftentimes when Cove
Capital is analyzing multi-tenant retail assets we are seeing
acquisition cap rates that are meaningfully higher than single
tenant net lease properties. This translates into a higher
potential cash on cash return for our investors in a multi tenant
retail DST as compared to a single tenant net lease DST
offering.
* Cash flow and distributions are never guaranteed in any type of
real estate investment. Please read the full Private
Placement Memorandum for a discussion of the business plan and risk
factors.
The 20-Year Odyssey of Multi-Tenant Retail
Assets
Like Odysseus, the hero in Homer's famous epic
poem, multi-tenant retail properties have been through quite a
journey over the past 20 years. From a real estate investment
perspective, multi-tenant retail properties reached their peak
during the mid to late 2000s. Back then, investors had easy access
to credit, low interest rates, and upbeat economic forecasts.
Investors flocked to multi-tenant retail properties because they
offered diversified income streams from multiple tenants,
potentially reducing risk compared to single-tenant properties.
Additionally, retail space was in high demand due to consumer
spending trends and the perceived stability of the retail
industry. This demand and perceived security in multi-tenant
retail assets continued to drive up the pricing of these assets and
drive down initial going in cap rates.
Today, in retrospect, it is clear to see these assets were
overpriced and just didn't make sense from a per square foot basis
and the super low cap rates they were delivering. Still, many
investors entered these investments using high leverage, balloon
mortgages and with a belief the multi-tenant asset class would
continue to appreciate.
When COVID-19 hit in 2020, the retail and restaurant industries
were upended, and many stores went out of business. On top of this,
the online shopping trend kicked into high gear, as consumers
quickly figured out that ordering online was easier and more
convenient than visiting their local mall or retail center.
As a result, the multi-tenant asset class continues to
experience some distress, and investors continue to shy away from
it creating compelling acquisition opportunities for capable real
estate operators.
Cove Capital Investment's Thesis on Why Now Could be An
Opportune Time to Invest in Multi-Tenant Retail Properties
Warren Buffet, the world-renowned investor once said, "Be
fearful when others are greedy and greedy when others are fearful",
and we believe this philosophy perfectly reflects the multi-tenant
asset class today.
For example, right now investors are afraid of multi-tenant
retail assets and are moving aggressively into other asset classes
like multifamily and industrial properties where the perceived
distress is much less visible.
Because Cove Capital Investments practices contrarian investment
strategies and emphasizes capitalizing on opportunistic investment
pockets that other professional and institutional investors may
overlook, we believe this trend of moving away from multi-tenant
retail properties presents a unique opportunity for investors, and
to quote Mr. Buffet, "the time to be greedy."
Five Specific Reasons Why Investors Should Consider
Multi-Tenant Retail Assets
Reason #1:
High CMBS loan default
environment
One of Cove Capital's contrarian
investment philosophies is its focus on buying debt-free assets as
a specific strategy to help Delaware Statutory Trust 1031 exchange
investors mitigate risk. However, many owners of multi-tenant
retail properties have purchased these assets 5-10 years ago and
have put very high loan-to-value Commercial Mortgage-Backed
Securities (CMBS) debt on these assets. In the current rising
interest rate environment, assets that were purchased with a 60% or
70% loan-to-value (LTV) are now more like a 85% to 90% LTV. With
many of these loans coming due soon, Cove Capital Investments
believes there may be opportunity to acquire these assets at
discounted prices. Furthermore, it is estimated that approximately
$126 billion in commercial debt is
coming due next year alone, and over $1
trillion of debt is coming due over the next three years.
Many owners are going to have a hard time refinancing these highly
leveraged loans with the current interest rate environment.
Cove Capital believes that the current high CMBS loan default
environment creates an opportune time to acquire multi-tenant
retail centers for its 1031 exchange DST investment platform.
Reason #2:
Distressed Assets abound.
Based
on our research, Cove Capital believes that in 2023 alone, there
was currently approximately $64
billion of distressed multi-tenant assets in the market.
This distress has triggered high foreclosure rates, and mounting
pressure on owners facing maturing loans in the very near future.
Adding to the situation is the fact that lenders are backing away
from lending on retail assets, and many owners have minimal cash
reserves for upgrades, deferred maintenance and re-tenanting. As a
result, we're seeing a lot of properties with tons of deferred
maintenance as landlords have neglected to put money back into
these shopping centers. Discontent among tenants is also very
common.
Cove Capital believes the level of potential distress within the
multi-tenant retail asset class presents a unique investment
opportunity for DST investors.
Reason #3:
Poorly Managed Retail
Centers
Another trend Cove Capital Investments has
noted is that property owners are not keeping leases to current
market rates. The main reason for this is that owners are trying to
keep tenants in their spaces and can't afford to re-tenant their
properties. On a broader level, we are seeing many examples where
there is significant deferred maintenance issues with these retail
locations.
For example, our acquisitions team is seeing deferred
maintenance in the parking lots, roof systems, HVAC systems,
building facades and elevations that are old and need to be
updated.
We are also seeing examples where property owners are signing
gross leases (where the tenant pays a base rent, and the landlord
is responsible for covering the remaining property expenses) as
opposed to triple net leases (where the tenant pays base rent plus
property taxes, insurance, and maintenance) as a way to get
potential tenants in the door.
Again, Cove Capital feels there is an opportunity to convert
these gross leases into triple net leases and re-tenant should the
original tenant vacates.
Reason #4:
Potential
Opportunities
When examining the multi-tenant retail
asset class as a place for opportunities for its Delaware Statutory
Trust program, Cove Capital believes that many opportunities
present acquisition prices per square foot that are well below
replacement costs. As a result, we feel there is an opportunity in
the multi-tenant asset class to potentially grow the NOI of certain
properties by taking rents to market rates and leasing those
vacancies at current market rates.
Another unique opportunity the Cove Capital's Delaware Statutory
Trust acquisition team has noted relates to outparcel pad leasing
opportunities. Specifically, in some cases there is an opportunity
to create on outparcel pad for a single tenant creating increased
NOI potential and its resulting value possibility.
Reason #5:
Cove Capital is an all-cash
buyer
Unlike many other Delaware Statutory Trust sponsor
firms that utilize leverage when purchasing properties, Cove
Capital is an all-cash buyer. This presents a level of
comfort to sellers of properties that we have a certainty of
closing whereby there is no lender involved in the
transaction. Oftentimes, Cove Capital will not be the highest
bidder on a property yet we will be awarded the deal by the seller
due to the fact that we are all-cash and our reputation of
consistently closing on assets throughout the country.
The all-cash nature of Cove Capital's business plan not only
protects investors from a loss of principal due to a lender
foreclosure (since there is no lender on the property) but it also
allows us to negotiate better pricing for our investors on our
acquisitions. This is especially important to sellers that
have some level of distress and need certainty of closing due to a
loan coming due or a situation where they are undercapitalized and
don't have the funds necessary to backfill vacant space or extend
existing leases.
In Summary
Cove Capital believes there is significant upside potential
within the multi-tenant retail sector, and is committed to
identifying and acquiring properties where there are believed to be
opportunities for growth and value creation.
While each multi-tenant retail property is unique, Cove Capital
believes there are multiple opportunities to improve net operating
income within the multi-tenant asset class including offering
incentives for early lease renewals and strategically converting
gross leases to net leases. Couple these strategies with
implementing proactive marketing efforts to fill vacant spaces, and
capitalizing on out parcel leasing opportunities, and Cove Capital
believes it can foster a mutually beneficial relationship with
tenants while also maximize return possibilities for its investors
and continue to establish itself as a leader of contrarian thinking
within the evolving landscape of commercial real estate and
sponsoring Delaware Statutory Trust investments for 1031 exchange
investors.
About Cove Capital Investments
Cove Capital
Investments is a private equity real estate firm and DST sponsor
company providing accredited investors access to 1031 exchange
eligible Delaware Statutory Trust properties as well as other real
estate investment offerings. The Cove Capital team consists of
Acquisitions, Asset Management, Accounting, Due Diligence, In-House
Counsel, Investor Relations, Marketing and Capital Markets. Cove
Capital maintains a robust current inventory of DST and private
equity real estate offerings potentially available to investors.
Cove Capital Investments has sponsored over 1.9 million square feet
of 1031 DST and real estate offerings totaling more than 2.1
million square feet of real estate in the multifamily, net lease,
industrial and office sectors. Currently, Cove Capital has more
than 1,690 investors.
For further information, please visit
www.covecapitalinvestments.com or contact Cove Capital
at (877) 899-1315 and via email at
info@covecapitalinvestments.com.
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