Jamison

Welcome to another episode of Kiss My Assets, this is Jamison Manwaring, cofounder of Neighborhood Ventures, and I'm here with Chris Lacasse. Hi, Chris, how are you doing?

Chris

Good, Jamison, how are you? Good.

Jamison

Chris is VP of acquisitions at Neighborhood Ventures, and we're here in Phenix in early November, and it's about 75 degrees outside. And Chris is Canadian, and you're probably glad you're not in Canada right now. It's probably snowing up there.

Chris

Absolutely. I was looking at some friends Facebook pictures from Halloween and trick or treating in the snow, and I'm happy I was in a T-shirt.

Jamison

Yes, that's how I grew up, too. In Idaho, you just get used to bundling up your kids here. They don't have to do that. It's the way, the way to do it. You absolutely know how to live here and so on.

Jamison

And this is why we live here. Wanted to bring on Chris today because a lot of things are happening in the retail market. We at Neighborhood Ventures did our first project and retooled this last year. Now, months ago at Venture on Broadway in Tempe, and that project is moving along well and we're super excited about what

Jamison

that project's going to mean for us. We have a great tenant in place with Burger Rush and then a lease signed with Dunkin Donuts, which is obviously a big, a big national tenant. So we're really excited to see what happens at Broadway and to see the progress that's already happened, but wanted to bring you in Chris and

Jamison

talk a bit more about what's happening in retail right now. And so just to kind of kick it off. There's a lot of trends that impact retail in the most recent one being covered with tenants who decided to move out.

Jamison

They couldn't afford the rent. We heard about Subway deciding they stopped paying rent altogether right out of the early on in COVID, they said, We're not going to be paying our rent and I don't know exactly how they're dealing with that now.

Jamison

If their landlords are letting them slide on that, if they're paying back rent now, now that things are functioning. But retail's been in the headlines a lot, obviously with COVID more so than multifamily, where people had to live somewhere, so they continue to pay their rent at a pretty, pretty regular clip.

Jamison

And now multifamily values have even moved up from there. The other thing with retail that we read a lot about is it's the impact of online retailing to retail real estate. Your typical bricks and mortar stores that have been impacted by Amazon and others.

Jamison

So maybe just , foot view for somebody who's been working in retail for a long time. How do you see those trends and where's retail at today? Yeah.

Chris

So it's kind of two aspects to that. There's the national aspect and then the local aspect nationally. When you hear over the last decade that online sales have tripled, it sounds huge. But in reality, even at the peak of COVID across the U.S., online sales were % of total sales.

Chris

So, you know, it's still a lot of sales happening in brick and mortar locations, and that's even come down since then. I think we're in the low teens, actually. I think it's about % now. And that big shift, a lot of that grocery, grocery, online sales have definitely ticked up.

Chris

Yeah, there's still a lot of sales that happen every day at locations, at restaurants where maybe you could do Grubhub or whatever it is, Uber Eats. But a lot of people just like to get out and go eat places, and they need to get their haircut or nails done or dogs groomed.

Chris

And these are things you just can't do online. There's still a lot of things that can't be done online, so there's still a pretty strong market for that. That's on a national level. And then at a more local level in Arizona, we've sailed through the pandemic compared to a lot of other states.

Chris

Any locations that have closed restaurants, Subway, for instance, any of those locations that closure and COVID were struggling before COVID and anything that was vacant was quickly snapped up. Our vacancy rate in retail, I think, hovers right around six %, and a lot of that is actually big box space kind of any of the smaller space.

Chris

It's still pretty low vacancy rate and anything with the drive thru, you're talking about less than % vacancy rate. The retail market in Arizona is really healthy. Even kind of peak pandemic, surprisingly enough, was still really healthy.

Jamison

That's the sort of thing that as we look at our daily lives and how how we all tend to live, it makes sense. The drive throughs, you know, you drive, you drive down a main road and you look at the Dutch pros and Canes and Chick Fil A.

Jamison

You know, this drive throughs are just booming and the there's some retail that works well, and then there's probably some retail that shift shifted out. Think of the typical insurance agent with GEICO. They're mostly online, and then they add their retail stores.

Jamison

Actually, they have retail stores now, but there are some industries that have shifted out of retail more than others, and then some are with restaurants. That's a good point. Those come back so strong and in our market. What are you seeing as far as how deals are being priced right now relative to pre-COVID?

Jamison

When we look at some of these retail deals and maybe the smaller kind of infill retail deals, not the big box stuff, but just more of the stuff that we've been looking at.

Chris

Pricing is essentially an all time high. Supply and demand is a huge amount of demand from out of state, from people in states that maybe didn't weather depending. Mick, as well as we have here in Arizona, so there's a huge desire to invest in our market in any of these kind of stabilized retail deals that we're talking

Chris

about are typically priced on essentially a multiple of the income they have. So call that the cap rate. Yeah. You know,, in income on a million dollar purchase would be a % cap rate. So that's kind of how we track the pricing of these deals is a cap rate.

Chris

And we're seeing some incredibly low cap rates down in the three and a half percent range for some of these absolute triple net deals, which is great for us on the sales side, for sure, because and it's just a it's a function of the demand, mostly from out of state investors that see our market.

Chris

And even though the pricing is exceptionally high, it might still not be as high as they're seeing in their local markets, specifically with a market like California.

Jamison

Yeah, we hear a lot about California, with multifamily, with the growth that we're getting here from population migration, but it's also dollars. Yeah, as people decide who have cash in there, they might be in California, might be in the stock market as they look to where they want to put it next.

Jamison

PHENIX Arizona in general, has become a favorite spot and just want to back up on the cap rates because that's a good thing to talk about your scenario of. You have , in income. A % cap rate would make the value of that property $,,.

Jamison

Yes. So as the cap rate goes down, value actually goes up or the sales price goes up. So it's kind of an inverted or have a reverse impact as cap rates increase, the value of the building goes down.

Jamison

So let's say that same scenario, let's say it's a % cap rate, then that property is generating , in income, then that's million dollar building instead of ,, dollar buildings doubled in value because of the cap rate. So just to drill into that a little bit, so cap rates right now where they they sitting for a nice

Jamison

deal that has a good strong tenants, you know, Dunkin Donuts type tenants.

Chris

Sure, they're typically in the mid four cap rate range. That's probably about basis points down from where we were a year ago. So maybe a year and a half ago, that was five and a half. You know, we're about four and a half.

Jamison

On a triple net lease.

Chris

Yeah, on a triple net lease.

Jamison

And this is good, too. So it's what's a triple net lease.

Chris

Triple net lease is where the investor really just collects a rent check and the tenant is responsible for everything else. The tenant is maintaining the building, they pay property tax, they pay insurance, everything direct and literally investors just collecting a rent check monthly.

Jamison

So like our Broadway project, that's triple net.

Chris

That's correct. Yeah.

Jamison

So if the folks have an issue with the roof or some some other issue, they have to they have to pay it. The landlord doesn't pay it.

Chris

And that's correct.

Jamison

Taxes, utilities. And so for a landlord, it's nice to have that type of asset because, you know, you're just going to be collecting, right? You're not going to have maintenance expenses outside of of anything because they're it's all going to be covered by the tenant.

Jamison

Hey, everybody, thanks again for listening to our podcast, and I wanted to remind you about our social media pages, which is a great place to go to get real time updates on what's going on on our projects. You can find Rocky at Rocky Petersen effect on Instagram or on Tik Tok.

Jamison

You can find me at Jamison Man on Instagram or TikTok, John on LinkedIn. And then, of course, if you just type in neighborhood ventures into YouTube, you will find us there. That has all of our videos and is a great place to go.

Jamison

Also, we're on Facebook and Instagram as well for Neighborhood Ventures. Follow us on our social media. That way, you can know what's going on all the time, and thanks again for listening to the podcast.

Chris

That's exactly right, and I think that's one of the key things to touch on about the retail market specifically and how it differentiates from office or multifamily is exactly that. You have a little bit more surety of what your monthly income is going to be from that property because you know that those other expenses are covered with

Chris

some of those other asset classes. There might be a fluctuation in utilities or whatever the case may be. So, your income might be up or down a little bit, whereas the little bit more predictable income.

Jamison

Yeah, with multifamily, you might get a pipe, the breaks and you have a or , dollar bill or a leaky roof, you know, a monsoon season and all the roofs were good. They start leaking and it's a big bill.

Jamison

And as a multifamily property owner, you have to fix that. The the residents who live there don't fix that occurs. Go out. What have you? And then the other thing with with retail is its triple net, so the maintenance expenses are minimized or to basically zero it out.

Jamison

And then you also have longer term leases. And there's positives to that, and there's negatives to that. You want to talk a little bit about the positives and the negatives to that. Sure.

Chris

I mean, it's nice to kind of lock that in on a long-term basis. five years, ten years. Often a lot of the more national tenants, you'll get a ten or year lease and you'll have rent bumps every five to ten years or every five years.

Chris

Sorry, the rental rate would bump by whatever fixed percentage. But you know, using multifamily as an example, you can kind of keep up with inflation a little quicker when you are redoing leases every year. But the nice side on the retail side is, again, it's that more predictable income and cash flow.

Chris

That's kind of nice.

Jamison

And that's part of why we like to do both, because right now we're in an inflationary market, so it's nice to own multifamily. You can move rents up, but there will also be that time where people have to be able to afford it.

Jamison

So, you can only move it up so much. And on the other side of it, a longer-term lease with high quality credit tenant is almost like an annuity. You know that that money is going to be coming in.

Jamison

You don't even have the maintenance expenses. So, they're just they're so different and and having a sum of both makes a lot of sense, right? So, what are we seeing right now as far as deal flow in Arizona?

Jamison

I will say we've looked at a few deals in the last couple of months that we've passed on. You want to talk a little bit more about what you're seeing and what the markets like.

Chris

Sure. So, it's incredibly competitive. There is a decent amount of deal flow because I think a lot of sellers are seeing this as kind of a maximize value in some scenarios. So, they're happy to get out there and supply and demand find a buyer for their property.

Chris

We're we're extremely diligent with our timeframes for due diligence and the purchase prices that make sense for us of the many deals we look at. Maybe it's %. That kind of makes it through the initial final until we dig in further.

Chris

And then when we're digging in further, if that deal doesn't make sense or we don't think that the reward doesn't justify the risk, then we pass. And, you know, I think that's something that we've been seeing a lot of and there's more aggressive buyers out there than us right now.

Chris

So, we're happy to let them take those deals and we'll dig in deeper to find deals that make a little more sense. I think one of the things we're kind of bumping into is with the increase in construction cost, it's now pushed rental rates to be higher to justify a lot of these construction projects or leasing projects

Chris

, just getting a tenant in place. Sometimes you have to spend quite a bit of money to do that. And so those rental rates are moving up and at a certain point, the sales for that tenant starts to get squeezed a little bit or the affordability of that space for that tenant starts to be constrained.

Chris

So as a consumer, I think that we all need to be prepared that prices and a lot of these restaurants or other retail locations are going to start creeping up. And a lot of that comes down to construction costs and pass costs ultimately being passed on down to the consumer.

Jamison

Ultimately, the economics are all going to come together somewhere someone pays, pays for the the higher costs that we're seeing in construction. Ultimately, it comes trickles somewhere. And so that's interesting. I've noticed some of my favorite restaurants have bumped up rates on their food, and you don't notice it a lot because it's a few cents here on

Jamison

there. But if you track it over a couple of years, you can see it's really moved up. And that's because their costs have moved up their cost of food, their costs of rent, their costs of employees. That's actually what leads to inflation is is that just cycle kind of like a cyclone just kind of picks up everything

Jamison

and says, OK, we're going to charge more and everything's going to be more expensive. And that's what leads to inflation and we're seeing right now. I'm not convinced that inflation is going to stay at the same pace, you know, around the % that we've seen the last couple of months that as we get some of these cargo

Jamison

ships in Long Beach, the cargo off of them and on the trains and get them into the country, I'm convinced that things will settle in a bit more normal, but we'll see. Yeah, I.

Chris

Think firsthand, it's something to touch on as well. From construction costs standpoint, we've definitely seen materials come down from where they were, whether it's lumber, tile, any kind of electronic. It has definitely started to level out, and we kind of anticipated leaving it out more as time progresses.

Jamison

Yeah, we saw that spike and there's kind of the fundamental things happening in the economy that really drive things and then there's temporary things and and I think a lot of the supply stuff is more temporary. And then it's just a matter of how much time does it take to get those back on track?

Jamison

They take a long time, then the cyclone can pick it all up and the prices stay a little higher. Potentially, we'll see. But that does impact retail in a unique way. So, it's a good point that you bring up that as we look at the cost of supplies moving up and the cost of building, moving up, how

Jamison

that is going to trickle down to the retailer and to the customer. So just one other caveat. Other markets that we're looking at outside of Arizona because we have, we haven't done any projects outside of Arizona, but we can and we did our first project outside of the Phenix area in Flagstaff earlier this year.

Jamison

Are there any markets to you that you like and tell us a little bit about why? Sure.

Chris

So, it's kind of the same macroeconomics that anyone looks at. It's really job growth and population growth. It's that simple. We also want to avoid competition where possible, so we're willing to kind of roll up our sleeves a little more than some of the bigger groups and be a little bit more hands on.

Chris

So, some of the smaller markets that are performing really well, something like a Boise, Idaho, for instance, where some of the bigger groups might not want to go to a market that size. I think it makes perfect sense for us and there's great opportunities there.

Chris

Specific markets in Salt Lake area as well, and actually Utah in general, some New Mexico markets as well. So, some markets that kind of have similar fundamentals to what we're seeing here, but are maybe not as competitively bid by either out-of-state or overseas buyers like we're seeing here.

Jamison

What about Tucson? What do you think of them?

Chris

Tucson as well? It's a little bit more stable than Phenix, so it doesn't have the big spikes in growth, but it's pretty, pretty steady. It's, you know, big defense and education city. So it's pretty, pretty steady employment there.

Chris

So, you know, we're definitely looking for the right opportunities there. We're being very picky. We look at deals in Tucson pretty much every day, but we've got to find one that makes perfect sense. And you know, we're tracking things like the in place rents.

Chris

We want to be conscious of that. We want to make sure that there's good room downside protection, et cetera, to make sure those deals make sense for us.

Jamison

That's great. And we look forward to hearing more about Broadway as we get near the end of the year and start doing construction on that. They'll be an exciting time for all of us and for all of our investors to see that progress.

Jamison

So thanks again for coming on, and we'll have you on soon to talk more about Broadway soon.

Chris

Thanks.