Investors select real estate investment managers to oversee properties and earn returns. They seek “performance,” historically defined in terms of “experience” and a “track record for financial results.” But many investors fail to understand that past financial results are not indicative of long-term operating performance—they fail to recognize the difference between ten years of experience and one year of experience that has been repeated ten times.
COVID is an all too real example of a world that experiences unexpected, abrupt, and tumultuous change. The post-COVID world urges investors to change their historical perceptions of how to pick the most capable real estate investment manager.
Because short-term thinking wrecks long-term results.
Twenty years ago, grocery-anchored centers were the real estate “gold standard” and in high investor demand. As success gave way to more centers being built, some added cheap gasoline to draw customer traffic. When oil prices declined, cheap gas later became less of a draw. Supermarkets later saw new competition from untraditional retailers, such as Target and Walmart, seeking to boost unit revenues. Over-saturation reduced store volumes and led many traditional grocers to failure, including the likes of A&P, Earth Fare, Fresh & Easy, Wild Oats, and Winn Dixie.
As stores closed, landlords struggled to re-tenant these large retail boxes. Designed to accommodate single large tenants, these spaces could not be efficiently demised into smaller units. Meanwhile, new market forces undermined landlords’ efforts to fill these large vacancies. Online shopping and retail market saturation gave rise to growing large retail tenant bankruptcies, among them CompUSA, Kids R Us, Builder’s Emporium, Crown Books and Sports Authority. Even when landlords found prospective tenants, re-tenanting costs were substantial relative to their neighborhood centers’ values. The negotiating leverage on the few remaining large tenants forced landlords to bear most of these costs. The market had changed: While grocery anchors were originally the key to success, they now led to many neighborhood centers’ failures.
And then came CORONA. Mandatory closures and social distancing required many shops to close. Practically overnight, retail centers that had found new life by replacing supermarkets with gyms, trampoline parks, and bingo parlors are now threatened with potential demise. Ironically, grocery anchors are now the reason why some neighborhood shopping centers are managing to survive. How could anyone predict this chain of events and the speed of such change?
