I've been seeing many new construction, multi-tenant retail assets in small towns coming to market.

If you are a coupon clipping, dividend seeking investor, they might work for a number of years, but nobody is talking about their risks.

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Take a town of 10K people with low HH income and growth prospects. The investor walks in, buys the glitzy new Chipotle or Starbucks center at $400+ per foot and rents are around $35 NNN. It will throw off a dividend for the length of the lease but what's the downside?

Comes down to cost basis. You are stepping in and paying the highest basis for a retail property in the city by a large margin. You're the market maker for the highest rents (one could argue artificially.)

Let's say Chipotle decides to leave at the end of their term. What do you do? Your basis was built on $35 rent. You are in a small town where your average street rent might be $10. How are you going to backfill at $35?

You still have a nice unit so let's say you were lucky and backfilled at $20. Problem is, your unit just took a 40% hit in NOI.

Your building isn't new anymore and instead of a 6 cap you bought at, you are now looking at an 7.5 cap.

You may have paid $3 mil for the asset and it's now worth $1.2.

Like many real estate deals, the risk is in the basis.

Needless to say, new retail assets in small towns scare the heck out of me, unless there is some unique, compelling growth story.

As the world searches for yield, developers are feeding the machine but what will these investors be left with at the end of these lease terms?

This is why we are focused on acquiring existing assets, in solid markets, where our basis allows us to charge 1/3 or 1/2 new construction rents and achieve attractive yields in a much safer vehicle.

End.