This past week, a major West Coast shopping center developer told me, “Value doesn’t always mean cheaper.” He went on to explain that this principle applies broadly to many financial sectors, but has special relevance for retail real estate. At the heart of the matter, a triple-A retail location has value that transcends traditional investment metrics. Properties at these prime spots are the first to jump in rents, and the last to fall to bargain rental rates when the economy sputters. They also attract the best tenants, in terms of both store performance and timely rent payment. In fact, the best locations often come with those tenants already in place. These patterns hold through nearly any economic cycle, which explains why I am seeing a trend of buyers shunning some properties with better-than-market cap rates, while flocking toward others that, based on a sheer cash-on-cash analysis, seem like less desirable deals.

The raw numbers of course have their place, but we tend to overestimate their ability to reveal a buyer’s future with the building. As a major retail fund manager pointed out to me, “Data is great, but it’s always backward-looking.” When evaluating a property, looking at recent comps might tell you what the building would be worth if you needed to re-lease every store space. However, this information doesn’t matter much for AAA locations, since they always lease quickly, and often these days at elevated rents. In short, cash-on-cash, IRR, and similar data might give indications of the benefits of having owned a property. Yet those benefits tell only part of the tale in retail real estate. True value often lies in the benefits of owning the property, right now and as we turn the economic corners ahead.

—–Trever Gallina is a Vice President at Marcus & Millichap. Specializing in Retail property sales in New York City. 917.692.992