Summary
This package of three "urban" strip centers is rather unique in that these centers are very old but successful and well insulated from nearby competition from the Target and Wal Mart super stores. However they can still provide a good indication of value of high quality grocery anchored strips to guide the GLG reader trying to stay current on the market value of strip center REIT's portfolios.
Analysis
The three centers are all located in older suburbs of Kansas City and date back to the 1930s for one and 1950s for the other two. They are all anchored by Hen House Grocery Stores, not the most dominant but a strong second line operator in the Kansas market. They each average approximately 135,000 Sq. Ft. in size and together generate a NOI of $5.4 million annually. Their vacancy rate is approximately 5.5% which is in stark contrast to the Kansas City market rate of 13%.
Also interesting is the fact that the majority of tenants are locals who have managed to survive the competition from the national chains. This is probably due to the center's age and well insulated position to serve the local communities.
The three properties sold for a total of $62.1 million including debt for an average price per foot of $149.00. The real price however is known to be at least $3 million higher because the three were known to require at least that much in repairs and replacements.
Having dealt with many retail properties of this age I suspect that if the sellers were publicly acknowledging a need for $3 million, the real final cost could easily exceed $5 or $6 million.
The most important single "take-away" from this article is the "cap" rate for centers of this quality and/or NOI. According to a local consultant, two years ago comparable centers could command a cap rate in the 6% range. In my experience the cap rate for high quality strips is much closer to 9%. The announced cap rate for these three centers is shown at 8.7%.
In actuality, it is closer to 8% when the real cost of deferred maintenance or capital improvements is factored into the price. So the buyers paid a huge premium for these centers and the sellers, by staging a well attended auction, managed to get themselves a very nice price in today's economy.
