by Curtis Leick, Managing Director | March 2024
Demonstrating success in acquiring below-market lease rates and unlocking additional income opportunities.
Sower Commercial is excited to introduce a new offering to the marketplace later this month known as Sower Longview II Fund. This fund is an extension of our existing strategy focused on open-air shopping centers and will launch with over $50M in assets providing cash-flow to our investors. This strategy is focused on the open-air retail segment in top locations within secondary and tertiary markets. This opportunity is prime due to the extremely low vacancy rate for these centers and the recent run-up in construction cost for new development. This combination has created an environment for significant rise in rents and strong demand from expanding junior box retailers looking to access these markets.
Westview Center
The Westview Center is a 114,735 SF fully occupied open-air retail shopping center located in Streamwood, IL that will be featured in the Longview II Fund. The property is strategically positioned along the prominent Barrington Road retail corridor, which boasts substantial traffic counts exceeding 63,000 vehicles a day.
The submarket is densely populated, with a population of 255,000 within a 5-mile radius and a median household income of $89,000 annually. The property benefits from its close proximity to national retailers such as Walmart, Target, Menard’s, and Home Depot. Noteworthy tenants within the shopping center include recognized brands such as Auto Zone, Dollar Tree, and Oak Street Health.
A cornerstone of our investment strategy is acquiring assets at a significant discount to their replacement cost. Through strategic negotiations, we secured the purchase of the property at $90 per square foot, equivalent to 40% of the anticipated replacement cost. Purchasing at such a discount to the marginal cost of construction is a critical risk mitigant over our intended 10-year investment horizon.
Our investment thesis forecasts maintaining sustainable risk-adjusted returns in our base-case scenario, with multiple opportunities for outperformance that are likely to materialize and enhance the stated returns. Currently, existing leases have an average weighted term of 6.50 years, ensuring predictable cash flow for the foreseeable future. However, tenant turnover is expected to be accretive to investment returns as current rents in place are significantly below market rates, resulting in an effective economic occupancy of 52%. We view re-tenanting the property as a value-added opportunity by converting existing leases to prevailing market rates, leading to increased cash flow and property value.
Additionally, the property has considerable frontage along Barrington Road, creating another opportunity for outperformance due to the potential for developing a new pad site in the current detention area. Executing a lease for this currently unused area has the potential to enhance the value of the property and improve investment returns.
Our investment thesis of purchasing at a discount to replacement cost, acquiring below-market lease rates, and unlocking additional income opportunities, leads to sustainable risk adjusted investment returns with multiple opportunities to outperform the stated base case investment returns.
