Bob Ayoub and Troy Marcusof MIMCO, Inc.talk about their company and give their take on retail investment and the development market in today’s Texas real estate.
Tell me about your company and how it was started.
Bob: The company was started in 1972 by Morris Marcus as a grocery business based in El Paso, Texas. It was originally operated as a family-run grocery business, which grew to include small retail properties. When Mr. Marcus had a heart attack he decided to sell the grocery business and focus on his real estate investments. His sons, Meyer and Clement Marcus worked with him in the business and continued to buy small commercial properties in El Paso. Over the past 42 years, the company has grown to include over 320 properties located in El Paso, Austin, Dallas, San Antonio, McAllen, Fredericksburg, Brownsville, Hidalgo and Pharr, Texas as well as several holdings in Southern New Mexico.
Bob, when did you join the company?
Bob: As a commercial real estate broker I started selling El Paso real estate to Meyer & Clement around 1978 or 1979. We had family history together and were good friends so after brokering properties to them for many years I came on with the company in 1992. When I started here, the company included Meyer and Clement, myself, an assistant and a couple of property management people; today we have about 35 people in the office.
Troy, what is your background with the company?
Troy: By definition I became a full-time employee of MIMCO three years ago, but grew up interning in and around the company, much like my uncle and father. It was instilled in me at a very young age the responsibility of working for the family business and I was fortunate to grow up driving sites with my grandfather, father, and uncle. After spending some time working in private equity real estate in Dallas, the opportunity came up to move to Austin and expand MIMCO’s presence outside of El Paso.
Is the company still focused primarily on Hispanic markets?
Bob: A lot of our tenants are focused on Hispanic retail, but the reality is our shopping centers are in neighborhoods that cater to just about everyone, particularly in the Central and North Texas markets.
Troy:It made sense that we, having been established in El Paso, which at the time was about 70% Hispanic (today it’s closer to 84%) become focused on catering to Hispanic markets and value-oriented tenants. We have found that we are able to add the most value to a real estate project by improving properties that were previously mismanaged or neglected, as well as relying on the strong ties that we have developed with value-oriented tenants, bringing them into these newly improved spaces. This includes tenants such as Melrose, Peter Piper Pizza, Big Lots, dd’s, Ross Dress for Less, Goodwill, Dollar Stores and then, of course, your local and regional grocery stores that focus on providing high quality food at low prices. An example of a recent deal is in Fredericksburg, which is only 15% Hispanic, but the shopping center was focused around demographics and tenants that we’re very comfortable with (Bealls, Dollar Tree, Goodwill, and AT&T.) We’ve done the same in parts of East Dallas, Austin, and San Antonio.
So your expansion stategy is focused on demographics & value add?
Bob: Yes. The markets that we look at primarily are Hispanic focused markets, but basically we’re looking for value. We love to renovate shopping centers. We love to take an old beat-up shopping center, clean it up, fix it up and re-tenant it. As a result we’re looking at markets where those products are available. If a neighborhood is stable and national retailers start expanding into the area we tend to tag on to those retailers and look for value-add centers in that neighborhood.
Are you coming out of the downturn that was experienced by the majority of the CRE market?
Bob:Because we’ve built value-oriented shopping centers and had value retail tenants in a lot of our centers during the downturn, our centers and tenants were able to weather the downturn pretty well. I can tell you the biggest change for us has been that we’re looking at bigger projects and at markets that we never would have looked at before. We would not have looked in Austin & Dallas 10 years ago, and now we are. With the relationships we have established across the state and having Troy in Austin to work in the North and Central Texas markets, we’re much more comfortable in those markets and going after much bigger projects.
Has the criteria for your retail acquisitions & retail development been influenced by Eagle Ford Shale?
Bob: The markets that we’re in haven’t seen the huge spike as a result of that. We’re not in Midland or Odessa and we’re not in the areas just south of San Antonio. We think we feel it, because we think a lot of the neighborhoods we are in are seeing their income levels move up, and the centers are staying full, and very busy. We have a sense that there are good things going on in all the markets in Texas and I think that’s related to, basically, the oil boom across the State of Texas.
Troy: I would say there have been two indirect results that have had a huge impact on real estate in Texas. The first is the cost of construction. Given that oilfield jobs pay so well, a lot of traditional construction workers are moving into South Texas to work the Eagle Ford or moving out West to work in the Panhandle, so that shrinking labor pool is pushing labor rates and the cost of fuel and other factors are pushing material costs so as a result you have seen construction costs go up significantly . We’ve also seen a lot of wealth created as a result of this oil boom, and this money is looking for tangible assets, like real estate, to invest in. Consequently, there is more competition in what we’re trying to buy, driving prices up in all our markets.
Do you think at some point properties are going to be priced outside of the market in Texas?
Bob:Not really, I think people have a lot more opportunities to look across the state and even across the country to find product; factors driving the markets are the availability of funds, and as long as rates are cheap and banks aren’t paying anything on CDs, people are going to be looking for alternative investments. One of our key advantages in terms of buying and owning shopping centers is our focus on managing the product. You have to have management relationships or management staff in the markets that you’re going to operate in so that the centers are run efficiently and you are able to maximize their performance. Since we have those relationships and staffing we are able to be aggressive in buying centers. I do think investors will be looking around for the best places to invest. We are always looking, too, but now if we see something in El Paso, San Antonio, Dallas, or Austin, and we know the market, and the neighborhood, we have to decide if we’re going to pay a little bit more and buy it or not. Right now there is so much competition you have to pay the price or you don’t buy.
Troy: Bob and I recently discussed a report which stated that multi-tenant retail in 2013 traded at an average cap rate 43 basis points lower than the year prior. This is interesting because in that same year we saw the 10-year treasury jump 120 basis points from 1.86% at the start of 2013 to over 3% at year-end. While not perfectly, but generally, cap rates and the 10-year treasury track each other, but this was far from the case in 2013. I believe that this 160 basis point compression in spread does a good job depicting the increase in competition in Texas real estate. Following the recession, Texas received more attention (and in turn, capital) on the national and international level than in years past, and this has driven prices up. While there is still a market out there, I do feel that the presence of out-of-state buyers is growing, and their willingness to settle for lower returns is forcing us to work harder and find new ways to add value to our centers and our tenants.
Has this motivated you toward more development?
Bob: The problem with that is, you have to have the tenants ready to follow the development. Currently we’re developing two new centers in El Paso. We’re renovating in Austin, Dallas, and McAllen and whenever there is an opportunity to buy land that we can hold for a while we also do that. But development isn’t easy and timing is critical- you have to have the demand, the location, and the tenants, all in sync and ready to go at the same time, along with the capital and the financing, to make the project work- it’s the most exciting and demanding part of the business.
Troy: Given the increased competition, and in turn lower spreads, that we alluded to earlier, we are having to move up the risk-curve toward development deals to achieve the yields that we had in years past.
Bob: I don’t see interest rates going anywhere for a while. As long as the rates are going to stay low, even though construction costs are going up, tenants continuing to pressure developers on lease rates, and retailers changing their models and formats and store layouts (as they compete with the internet), there are a lot of people with the ability to borrow money who are going to build and develop new product to bring onto the market. Look at what’s happening with Dodd-Frank and the pressure on the banks to get out of other forms of investments to get back to basic lending. The more banks that are back in basic lending, which includes real estate lending, the more competition there is for loans, the more pressure there is on rates. That’s what we’re seeing. The banks are getting more and more aggressive on lending on real estate product and it’s because they’re being pushed away from their other financial products, so when they start doing that, the competition pushes the rates down, and that is why we don’t believe interest rates will rise much and development is sure to continue.
Are you seeing your retail tenants reduce the size of their floor plates because of the internet?
Bob: I don’t know if that’s true or not, but I can tell you that Best Buy has unveiled smaller formats, and several soft goods retailers that we work with are talking about shrinking their format. I don’t know if they’re shrinking it solely because of the internet. They may have learned to be more efficient, their product may be smaller (example: televisions), or it may be because internet sales are encroaching on their in-store sales. Others like Wal-Mart are looking at smaller format stores because they want to compete with the Dollar stores so they are rolling out their 30,000 or 40,000square -foot stores and they’re even talking about smaller stores like 6000-15,000 sf to be able to fit in big city and infill locations. The internet is a factor, but retail is changing, so the internet is not the only factor.
What is the prediction for Texas retail in the next five – ten years?
Bob: Solid growth across the state. We’re continuing to attract business to Texas. We’re continuing to attract new jobs, with new people moving in at an incredible rate. I think we’re going to continue to see residential construction growth and apartment construction increasing, both as the result of the large growth of jobs. This will also drive office construction and the need for new industrial. But it is when residential construction goes up that there is an increase in the demand for retail and thus there will be retail construction and that in itself creates jobs. We are extremely positive on the entire Texas market. There is just nothing that I can see on the horizon that is going to be a downside for Texas.