For D. Brooks Holstein, opportunity is just around the corner, down the street or just off the interstate or anywhere else people head to buy something.
Holstein has been a hunter of distressed retail centers for three decades, but the region’s deep and difficult commercial real estate slump has given him a much wider selection of properties from which to choose. “We are very busy,” he said, comparing the current distress cycle to the period that followed the sweeping federal tax reform of 1986.
True, Holstein is buying someone else’s problems, but he is doing it expecting a return north of 20 percent. “We typically haven’t bought anything for less than 50 to 60 cents on the dollar of quality product,” he said.
“We have always bought distressed resale.”
With land and soft costs figured in, building new is “going to kick the heck out of $200 a square-foot. I can buy distressed centers for anywhere from $30 to $80” a square-foot, Holstein added. “That makes a lot more sense to us.”
As managing member of Biloxi real estate investment company Comvest Properties LLC, Holstein hunts for values among debt-troubled retail centers, with the aim of fixing them up and turning them into neighborhood shopping destinations. On one hand, caution is key, but on the other indecision can be your enemy.
“It’s not for the faint of heart,” Holstein said at a recent commercial real estate roundtable in Jackson sponsored by the Mississippi chapter of CCIM (Certified Commercial Investment Member).
“You take significant due diligence risks, title risks…. To be a successful bidder in this type of asset class, you have to be willing to have a 20- to 30-day due diligence and 15-day close.”
No one likes to move that quickly, he conceded, but you can increase your comfort level by thoroughly knowing the property and market.
The alternative to doing sufficient homework is to “prepare yourself for the worst and hope it doesn’t happen,” advised north Mississippi shopping center developer Mark Utley, a panelist at the CCIM roundtable.
Holstein starts with a checklist as he assesses properties in Biloxi, Pascagoula and other towns across the South. “It has to have a potential anchor location open or available,” he said.
Twenty-five-thousand square feet for the anchor will fit the bill for a 50,000 square-foot center, he added. “It’s what we call a junior anchor.”
If the center is 100,000 square feet, Holstein prefers a 50,000 square-foot anchor.
“Ideally, we would want them to be in a place with the rest of the center vacant,” he said, explaining the idea is to start with a clean slate that allows for carrying out a strategic marketing plan for the center.
Other criteria includes:
>> A dominant market intersection;
>> Dominant lighted intersection;
>> A minimum of 50,000 square feet;
>> Vehicle traffic of at least 35,000 cars a day.
It helps as well if another supermarket or a WalMart is nearby.
Holstein also wants sufficient population – or rooftops – nearby and wants residents to have income levels sufficient to support the center.
“If one parameter isn’t there, we look to see that it fits the other parameters,” he said. “To us, it’s always about risk mitigation and can we be the dominant retail asset in a community.”
After the Deal
When Comvest outbids a local or regional developer or hedge fund to gain possession of the property, it typically gains a host of expenses and headaches, including taxes left unpaid by the previous owners, neglected maintenance and overdue improvements.
“The [original] buyers in many instances were passive investors with little or limited experience in retail centers,” especially running them in a down market, Holstein said. “They were simply buying on expectation of return.”
Engagement after the buy is important for the overall success of the venture, according to Holstein, who stressed the importance of the care and feeding of retail tenants. Their success is your success, he noted.
But if they can’t meet the bar you’ve set for them, you must edge them out, Holstein said, which explains why he prefers short-term leases. “You don’t want them if they aren’t doing $100 a foot” in retail revenues.
While Holstein’s Comvest Properties has acquired centers in Mississippi, a lot of its focus today is on opportunities in states such as Georgia and North Carolina. That’s driven by those states having more opportunities for acquiring distressed centers as well as the prospect for higher rents, according to Holstein. Small shopping centers in Mississippi will fetch $10 to $12 a square foot, while centers in the Atlanta area get rents of $14 to $16, he said.
The nature of the shopping center salvage business is that once a center is 90 percent leased with tenants paying full contract rates, you exit that business.
“We hold the properties until we have what we describe as rent stabilization,” Holstein said.
With the revival complete, Holstein resumes a search for the next opportunity.