The Greatest Vacant Retail

A friend who digs up fascinating opportunities - he’s so entertaining I should just hand over this newsletter to him - found an article about a handful of Walmarts closing. He flipped through the list of locations/cities, and “of course, they’re all liberal shitholes”… EXCEPT one that stuck out to us: Honolulu.

• The densest place in the state of Hawaii.

• A prominent location, as any Walmart would be. But not necessarily a killer retail spot, which would help us avoid being priced out.

• And a conversion, which would not involve as many horrible Hawaiian subcontractors or horrible Hawaiian permitting steps as a full ground-up/land development process would involve.

• And it would come with a $1m/year parking deck that could offset that annoying thing about development deals - the fact that they don’t make money for years.

And already zoned for storage.

It was perfect. I have a broker friend who lives in Honolulu, within a couple blocks of the site, who has closely watched - and participated in - a broad variety of dealflow on different islands over the decades. He explained that downtown Honolulu is quiet, in a bad way, and littered with homeless people. He couldn’t imagine it selling for anywhere near what the broker said they wanted. Which I think was like $40 million or over $450 per square foot of retail.

The seller was Walmart. We thought, they’re not in the real estate business and they’re worth $700 billion so why should they care about the price?

A quick model told me paying $26m might result in a 6.5-7.0% unlevered yield on cost. Here’s the math:

$2.46m potential income @ $39 per rentable SF x 63k rentable SF
$1m NOI from parking deck
$3.26m total revenue
LESS:
$880k in operating expenses (taxes, which I underwrote, and insurance, which I got a quote for, could easily be half that)
=
$2.38m NOI

The storage rents above were based on in-place information; there was no growth built into those rental rates. “Untrended” as we say in the biz.

$26m purchase price
$6.3m conversion cost ($75 per gross SF; very high compared to a typical ‘sunbelt’ market but everything is expensive out there, especially any demolition… the Janus quote we got was a fraction of this)
$2.1m carry costs
$1.6m in various other costs… soft costs, closing costs (Walmart wanted us to pay $300k in transfer tax)
= $36.4m total basis

Back in 2021 some could justify a 6.5% YOC in a market as small as Charlotte or Phoenix. Not anymore. What’s the adjustment to the cap rate or the yield if we’re talking about one of the highest-barrier, best storage markets in the world? At the time we were working on this one, i.e. last year, we decided a high 4s exit cap rate - for an asset this size, in this location, etc - was still possible based on anecdotal data points.

This also assumed we kept the parking deck income stream - the west coast-based storage management company we were talking to about this location said they could figure out how to run a parking deck for us.

Guess what? Our offer, which felt plenty aggressive to me, was scoffed at. We needed to get up into the mid-$30m range to be competitive, they said. Felt unbelievable.

We talked about how to convert the parking deck to storage to “juice the deal,” but, amazingly, a parking deck built to support 100 cars is still not deemed structurally sound for multistory self-storage by modern-day building codes. Modern-day building code stupidly assumes everyone fills their storage unit to the ceiling with lead bricks. So, we would’ve had to put in serious concrete reinforcements to bolster the structural aspects of the parking deck, and that was going to be more cost and complexity than we wanted to pursue.

After all this, we practically laughed at the price and let it go, thinking it would come back around to us.

It didn’t.

And yet again, I was unable to compete for a vacant big box retail space because the location was just too damn desirable to someone in another asset class.

Back to the salt mines of ground-up storage development.