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Shopping Centers Today -> May 2006
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Tenant improvements can increase return on investment, but not always
Do
tenant improvements have any positive impact on the sale price of a retail property?
Yes and no. In many cases, tenant improvements do increase a property’s
value but not always, experts say. An owner who makes improvements to capture
higher rents from existing tenants or to attract a better class of tenant can
sell at a premium because of the higher income stream — provided the trade
area can support such tenants, says Bob Mahoney, executive vice president of
the Oak Brook, Ill., office of CB Richard Ellis.
And provided the tenants are strong. “If you’re making an investment in tenant improvements, you have to invest in tenants with strong financials,” said Terry Bortnick, president of Reza Investment Group, based in Irvine, Calif. “In other words, if you’re going to invest $100 a square foot in Starbucks, that’s great. But if you take that same $100 a foot and put it in a local coffee shop, investors aren’t going to put the same cap rate on an income stream from a local as they are from a strong national.”
Also, if an owner goes too far with improvements, the property might generate top-market rents while not having any upside left for a buyer looking for a value-added play. In some markets, the demand for value-added properties is such that it might be better not to upgrade the property at all, but rather leave it all up to investors to do. In that case, the potential for improvements adds value.
“Maybe the current owner doesn’t have relationships with national tenants, or maybe they don’t have the funds to make a major turnaround,” said Bortnick. “So they’re better off letting someone who specializes in turnarounds come in. They’ll get a much lower cap rate than they normally would, because a center like that might not sell on a cap-rate basis but on a pro forma basis.”
— Dees Stribling
Appetite for Canadian properties “insatiable”
Canadian retail properties achieved returns of 21.4 percent on average in 2005, according to an index compiled by the Institute of Canadian Real Estate Investment Managers and the Investment Property Databank (IPD). Investors’ “insatiable appetite” pushed Canada’s overall average return on real estate investments to 18.7 percent, the highest in 20 years and a big jump from 13 percent in 2004, says Phil Tily, director of international operations at IPD. Keith Reading, vice president of research at Colliers International, Toronto, says the volume of retail property sales increased by 7 percent, and many of those were redevelopment opportunities.
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