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146: Mini-Malls in 2019?

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Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is Michael Flight. Michael is a real estate entrepreneur who’s been active in commercial real estate over the past thirty four years, is that right? He has over five hundred million dollars worth of real estate transactions. He is a partner at Concordia Realty Corporation which he started in 1990 and since then it has grown into a premier boutique shopping center investment redevelopment firm. Michael welcome to Wealth Formula Podcast.

Michael: Hey Buck thanks for inviting me on, it’s really a pleasure and an honor also, thank you. Buck: Appreciate that. You’re over in Chicago is that right?

Michael: That’s correct. We’re in the Western suburb.

Buck: Got it. As you know, I fled from there fairly recently.

Michael: You are a smart man.

Buck: Yeah I was actually there, I was in Chicago, it was last week. Great we’re right around the polar vortex thing.

Michael: Oh that’s perfect time to visit yes.

Buck: I had to go there because of one of my business is there and it was so cold and it was like you know I mean it was it was like 25 degrees below zero or something like that does that sound about right? That’s with wind chill.

Michael: Yeah they like to exaggerate it make it feel worse by saying oh it’s feels like 50 below with the wind so, it’s like minus 21, 25 is cold enough for me.

Buck: I was really happy to fly back to Santa Barbara and I get off the plane and it was like you know it was in that low 60s and I felt great and then within a day I was like darn it’s really cold here when is it gonna warm up so you get spoiled quickly. That’s part of the part of the joy of living somewhere warm. But anyway listen Michael it’s good having you on the show. Let’s talk a little bit about kind of your niche and this commercial real estate. We’ve never done a show that really focuses on this topic and this is why we’re gonna talk about it. We’re talking about shopping center, street retail, freestanding stores and you’ve been doing it for a long time. Why did you choose this niche, how’d you get started into it?

Michael: Actually it was kind of out of laziness. I figured out when I first became a commercial real estate broker that you could do a number of transactions with a tenant if you represented them and in the Chicago market if a retail tenant was expanding they might open 10, 15, 20 stores and so it was a lot less cold calling for me so that’s how I got into it and then I was hired by a major syndicator out of Philadelphia, they had about I remember now but it like 250 to 270 shopping centers nationwide and then the savings and loan crisis hit so everything kind of spiraled downwards and instead of relocating myself and a partner, opened up a shop and we did workouts and shopping center investment because we were both in the retail space.

Buck: What do you mean workouts? Were you lifting weights? What do you what do you mean workouts?

Michael: Workouts are when a bank or an insurance company or a financial institution forecloses on a property and then really doesn’t know what to do with it or needs to get rid of it so once they take it onto their books or we would help them on board it onto their books and then try and pretty up as much as possible and then sell it as fast as possible so it gets off their books so that they can realize it’s not a gain but minimize their loss.

Buck: Got it. So all right so why of all the different things that we can invest in even within real estate, what’s your argument or your reason for us to consider commercial real estate, the way we’re talking about in terms of shopping centers and street retail freestanding stores that kind of thing?

Michael: Well the great thing about retail real estate is number one its triple net so that the tenants pay for the real estate taxes, tenants pay for the insurance, and the tenants pay for the maintenance of the common areas. They also maintain the interior of their store and their storefronts. So in a typical shopping center the only thing the landlord would be maintaining is the structural components and the roof and if it is a full triple net lease then the tenant pays for even the maintenance of the structure in the roof. So that’s a great thing because it’s a lot less management intensive most of the time so you’re not like uncle toilets and you know knocking on doors for rent. The other great thing is that you are doing leases with national companies, so these companies have bond ratings so they they have credit and the leases go for longer periods of time so on a national tenant lease, we’re doing things anywhere from five to ten we’ve actually done with options leases with Walgreens for up to sixty years. So we actually have a Walgreens lease and one of our portfolios that originally started in 1957 and the lease was done before there was zip codes. So that that’s the the type of thing and then historically over the past few years retail has had better returns institutionally.

Buck: So let me ask you this though when you talk about yields, certainly I would imagine the yields are gonna be different if you have a Triple Net Walgreens compared to a mom-and-pop or you know some kind of just office building where they’re not bond rated companies. What are you focusing on?

Michael: We are looking for value add shopping centers although we used to do heavy value add type of things where they were almost development deals and it’s knocking down a percentage of the shopping center or in a few cases we’ve actually taken malls emptied them out knocked them down and built a strip Center in their place. Right now what we’re looking for is primarily stabilized shopping centers or shopping centers that we know that we can add value to through leasing and you know management in that type of thing but we’re looking for pretty fairly occupied like 80% and above and then we can add value through leasing and through the explorations and and that type of thing, that’s what we’re looking at right now.

Buck: There’s you know obviously when it comes to, and we talked about the line a little bit, when it comes to retail real estate there are a couple of elephants in the room so to speak that people always talk about at least in our sort of podcast circles, right? Let’s talk about those head-on. First true or false when the economy goes into recession a lot of the commercial real estate that you’re talking about suffers the most.

Michael: I wouldn’t say it suffers the most, but I would say that the retail real estate is directly affected by consumer spending and you know that, but the other thing that moderates that somewhat is a large majority these leases are over a specific period of term. So that if the economy happens to go into a recession, you know those leases might go right through it and so you might have some situations where you might have to reduce the tenants rent for a little bit but once we do do that we say you know we’re gonna work with you but you’re gonna pay us back that rent if it’s a local tenant. So that’s one thing so you’ve got that to protect you. The other thing is is that well I think that’s the the answer to the question I was going to.

Buck: What happened like back in listen back in 2008 obviously you know real estate in general was across the board was hit, how were how was your business affected by that?

Michael:  I would say that the the main thing that affected us was when we had tenant renewals, so if we had a vacancy, the vacancies weren’t getting leased for probably about two years and if we had a renewal, it was affecting us because the national chain stores at that point are going to say hey things are really not looking great and you know we’re gonna hammer you over the head, we’re gonna get we’re gonna lock in a lower rate at that point. So that’s what it was. I could tell you you know we made it through pretty well. There was a certain shopping centers that did go into you foreclosure and they were just higher financed and were able to perform on there they’re leasing and all the rest of that so we were able to to pick up you know one or two properties that way during the recession.

Buck: Sure the other elephant is Amazon, right? Or online commerce in general and you know obviously it’s becoming a bigger and bigger issue, you hear about a lot of the major brands that probably did have those higher bond ratings etc starting to go out of business like Sears for example. Can you, you know obviously you’ve got a lot of pressure coming from the online marketplace, do you consider that a big risk still in terms of your business?

Michael: Well let me address you the first thing and then we’ll get to the online part. Sears department stores, JC Penney’s, they they really don’t have a reason to exist anymore because they’ve lost their customer base and people aren’t going to Sears, people aren’t going to Kmart. If you take a look at tenants that are doing well like Walmart and Target and Marshalls within the case of Walmart, Target they specifically revamped their stores so that they’re doing online and they’re doing delivery, they’re doing it whenever, wherever, however. So they both had record sales years last year. And it’s the stores that number one haven’t really figured out what to do and so JCPenney I don’t expect them to be around much longer or a lot of the bankruptcies were by retailers that were taken over by buyout firms and heavily leveraged and then didn’t have the financial wherewithal to either re merchandise their stores in putting up their stores change some of their merchandise mix or start some sort of you know online web presence so that they could have an omni-channel thing. So that’s to kind of address what all the retail bankruptcies are and where there’s a few retail bankruptcies that even have happened that within the past you know 30 days so but like I say a lot of those are in markets where they’re just not as competitive. And now to answer your question about Amazon. Amazon realized that it just can’t be a completely full online retailer so they paid thirty five and a half billion dollars for Whole Foods and so in order to get their full omni-channel distribution, and there’s a lot of online tenants now realizing that as soon as they open up a physical store they’re actually getting a bump in sales and it’s the same situation when a physical retailer closes a store it actually decreases their online sales. So most retailers now know that they need to have some sort of omni-channel and there’s some pretty exciting stuff like Kroger has a thing where you know in order to the meals, the meal plans when you do the monthly meal plans and they deliver them right to your door, well Kroger has that but you can like actually go to the store and pick up the full meal and just take it out right there so you can order it on an app online and boom it’s out the door Walmart is doing some really cool stuff that you can order on their app for pickup and with geofencing they know when you’re three miles away when you’re one mile away and when you’re in the parking lot and supposedly they have the system down so that they’ve gotten the stuff out to the customer within 11 seconds. So a lot of these guys are doing a lot of stuff to you know to say hey we’re going to just give the consumer what they want where they want how they want it so you know and better retailers are doing that.

Buck: So in terms of Concordia, how can you get higher returns if you’re focusing on these bigger companies, I guess that’s part of what my confusion is a little bit because I get your point. You have a Walgreens. I don’t care if you’ve got Amazon or not people need their corner store they need their 7-elevens they need you know their Dunkin Donuts, whatever, but and those types of triple net leases I can’t imagine are providing much yield, so in a fund, how do you balance it so that you can actually get yield or what do you do to manipulate it in terms to to get the right kind of returns?

Michael:  Well actually part of the thing that’s really kind of helped with the internet and kind of trying to internet proof things is a lot of retailers used to prohibit restaurants and they used to prohibit other types of uses in the shopping center and they realize it’s like okay so if we exclude all these other uses then we’re gonna have a vacant shopping center. We don’t want that. And so they want people coming to the shopping center. So we’ve been able to replace a lot of those or some of those tenants with restaurants, and restaurants do higher volumes and usually pay higher rents and so that’s good, and then it brings people to the shopping center and typically if people come to the shopping center they eat, they also might purchase something or they’ll at least stay in the shopping center longer and so you have a higher chance of getting them to purchase something. And then we get some better rents with medical use because you’ve got a little bit more capital upfront in terms of building out the medical space, but you’ve got higher rents because that tenant improvement is capitalized over the life of the lease and you get some a doctor’s group or a hospital group guaranteeing the lease.

Buck: It sounds like you’re kind of pretty broad in terms of the fund, you’re doing everything from restaurants to you know Walgreens to medical offices, is that right?

Michael: Yeah while we do that, we don’t necessarily do you know a bunch of single tenant deals, we primarily by shopping centers and where we get into single tenant deals is if we’ve got either a vacant out parcel which is like the restaurant or the Walgreens out in the front of the shopping center, that’s where we’ll get into you know maybe a change of use or you know a single tenant lease. And then the other way we add value or return capital faster is a lot of times we look for shopping centers that have a out parcels, like a McDonald’s or a Jack-in-the-box or something like that or even a Walgreens and so you can buy the shopping center let’s say at an eight, seven eight or nine cap and you can sell a Walgreens at a five cap or you know a six cap.

Buck: Meaning the Walgreens is part of the shopping center already?

Michael: Right so you’re buying the entire parcel wholesale and then you’re splitting it up and selling it off retail.

Buck: Got a like sort of office condominiums.

Michael: Exactly.

Buck: Right understood. Well interesting. So where are you buying right now? There’s specific markets that for this kind of niche real estate is better than others?

Michael:  I will tell you since we brought it up, I I’m not buying anything in Illinois right now, the real estate tax issues here are crazy. We really like Indiana which is right next to us. We think that there’s a some really good growth in Wisconsin, in Michigan also are doing fairly well and we have partners in Texas, Tennessee, Phoenix Arizona and we really like Nevada. So we’re we’re still playing with a deal that we’re trying to make work up in Reno because Reno is just exploding right now with population, Tesla, Apple just bought like a thousand acres there and I believe Google about 1,500 acres there and then there’s a few drone companies out there so Reno know we think is going to be the next Austin.

Buck: Got it. So are you concerned about at all right now, like how are you positioning yourself or are you doing anything differently now than you were doing say back in 2012. You know I mean everybody says the economy’s really hot and you know some level of recessionary activity is inevitable etc, you know I mean maybe it won’t be the zombie apocalypse but maybe there’ll be some level of softening. Are you guys doing anything different right now to try to mitigate that risk?

Michael:  We’re being much more comfortable. Since we started out basically in a major recession in 1990 and we’ve been through you know three full cycles, we we’ve seen it come and we’ve seen it go and we’re just being extremely cautious but at the same time you know we can see a lot of opportunity and the great thing about people talking about the collapse and the apocalypse of retail is that there’s been a little bit of a dislocation in the market especially for some of the properties that we look for that might be a higher cap rate and a little bit out of favor. And then the other thing is is that publicly traded REITs have really been punished lately because of that and so they’ve been unloading a lot of property too so it’s actually created a pretty good buying opportunity and you know we’re just making sure that we follow what our acquisition criteria is and we don’t get too crazy about hey this is a really great looking Center and we really want to be here it’s like does it really make sense and so I have this discussion probably every other day with our acquisition guys because it’s like I want to pull the trigger, I want to pull the trigger, it’s like I know you do.

Buck: Yeah fantastic. Well listen Michael where can we learn more about you know your business and what you’re up to?

Michael: They can go to our website it’s ConcordiaRealty.com

Buck: We’ll put something in the shownotes there too. And I want to thank you very much for being on the show. I know we were talking earlier. It’s an area that I have not explored much, but I want to make sure that for people who have an interest in in investing in this kind of real estate that they had some information so I appreciate you again being in Wealth Formula Podcast today.

Michael: Thank you very much. And I really, I signed up and I’m looking forward to seeing you in Scottsdale.

Buck: Good!. Yeah we are sold out. Yeah that is uh that’s good news. I’ll see you there and I guess other people get a chance to meet you there as well.

Michael: Thank you.

Buck: We’ll be right back.