AutoZone in Lexington, KY with Chris Ressa

Topics: AutoZone, commercial real estate

Transcript:

Chris Ressa 0:01
This is retail retold the story of how that story ended up in your neighborhood. I’m your host, Chris ReSSA. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC management. Welcome to retail retold everyone, and happy Thanksgiving. I hope this Thanksgiving brings you joy, happiness, I hope that you have a lot to be thankful for. I have a ton to be thankful for. And if you didn’t get to connect with relatives, last Thanksgiving due to COVID-19 and all the pandemic restrictions. I hope this Thanksgiving, you get to spend some time with relatives that maybe you haven’t seen in a while. On this episode, I want to talk about two things. One, an article I just read that was released on November 19, by Fast Company on should you buy or lease space for your commercial business. And to a story of how Autozone ended up in Lexington, Kentucky, they just opened in a senator that we own. So let’s jump into the article in Fast Company. The title of the article is Read This Before buying commercial real estate for your business. The whole Buy Lease conundrum has been around since the dawn of time, should you buy it or should you rent it. So this is nothing new. But I thought given the increased demand for commercial space, in particular and retail real estate. I thought this was a very timely article by Fast Company. And they give four considerations in the article. Experience in property investing is one you could get stuck in a bad location can end up opening yourself up to liabilities. And the fourth is capital depreciation. I’ll never forget when I just graduated college, and my first job out of college was Sherwin Williams was in the real estate department. They were opening new stores were open district offices were opening warehouses, really good commercial real estate experience for me. I had done by lease analysis in college and finance courses and, and for study. But now this was real life. And I was at a job. And one of the things I always thought was that the Buy Lease analysis here there was math to it. But one of the big considerations was just the availability of capital to you. And at Sherwin Williams, obviously, this was a fortune 500 company, it was a public company. They had capital, and I’ll never forget, they were leasing. Just about all their space. I’m sure there was some that they bought. But at least the stuff I was working on. We were leasing it all. In one day, I went into my boss’s office, I was like, why don’t we ever buy. Now obviously, if you’re leasing the space and an integrated multi tenant shopping center, it’s probably a little different. You’re not going to be a landlord for all these other tenants. That’s a whole nother kettle of fish. However, there were often freestanding buildings that we were building out of the ground, or developer was building for us. And we were leasing into the building or the ground and we weren’t buying. And I was wondering why. And obviously you could do the Buy Lease analysis. And I think many retailers do that today. And they look at you know, cost of capital and should we buy or lease. And it’s a math and time analysis. But one of the things that really registered and I think this is a good business lesson, really registered for me was if you take the total available capital to buy, how many locations? Could we lease for the same cost that it cost to buy one? And so my boss at the time made me do an analysis of how many locations could we lease at like our average rent, versus an average cost of buying a specific market? And the answer was many more locations. It was like five or six locations. I don’t remember exactly, but it was we could lease a significant amount more locations, it might have even been 10 We could lease a significant amount of locations compared to buying just one which was profound to me. Obviously, the math is simple, right? It’s just addition I like let’s say the Elise is 100 grand, and the building costs a million while you could rent it for 100 or buy it for a million. And there’s obviously more that goes into the analysis in costs and whatnot, but it’s just simple type math, right? And he was like, now, let’s just use the number five. We get to sell paint in five have times the amount of locations because we leased versus when we bought. And we’re in the paint business, Chris. And that was profound for me. There’s a lot of entrepreneurs that open locations, and the thought of owning their own real estate potentially could sound appealing to them, I always go back to that lesson, which is, what is the business we want to be in, let’s not get distracted from that, let’s grow that, then obviously, as you get to scale, there might be opportunities where the only way to get the location is to buy, okay, or maybe the math is so compelling to buy versus lease. Now, I think the Fast Company article brings up many good points, the one that I come to all the time is, where do we want to focus. But imagine the retailer started buying shopping centers with multiple tenants, they’re in their own landlord, business. Now. You don’t want that to distract from your core of where you’re really growing and where you want to go to. There are certainly times where commercial businesses buy, and they should, whether it’s to get a specific location, whether it’s the math is just so compelling on the buy, versus lease analysis. But there’s also really sound reason to rent and lease. And I think many people listening this podcast, know that but I wanted to share the story, how we were looking at it from the inside of a corporation that opens many locations. Now, this was a long time ago, this is how we looked at it then when I was there. But I think a lot of that holds true today. And it’s not just retail, right? major corporations lease office industrial space across the globe. And this analysis is done by everybody. So you can do the math. And it’ll be simple math pending on your cost of capital and a bunch of other things. Does it make more sense to buy or lease however, the point I wanted to make, it’s not just the math on that one location. I go back to Sherwin Williams days, and we wanted to sell more paint. That was the goal. The real estate was a way for us to sell more paint. And therefore, we wanted to open more locations, acquire more real estate through renting, so we could sell more pain. Okay, that’s part one. I hope you found that interesting. Part two of this show, I said I wanted to talk about the opening of AutoZone. In Lexington, Kentucky. And this isn’t some crazy story. But they just opened, which as many of you know if they just opened, there was construction, at least negotiation. That means this was happening probably at the height and in the middle of the global pandemic. Well, we’re going to Center in Lexington, Kentucky, great location on Nicholasville Road, that road takes you right to the University of Kentucky, great market, we have a strong center. And we had an out parcel with pure one. And everybody knows, they filed for bankruptcy that closed locations. We were getting ahead of this and we were prepping coming into the pandemic. And we looked at the infrastructure, the building. And we looked at a lot of scenarios and we went to market we took this to market, there wasn’t a lot of variability. So we got a lot of interest for a lot of different scenarios. The one that we chose to go with was the scenario of cutting the building into smaller shop space that was going to be primarily restaurant service uses that on a per square foot basis paid much higher rents, and they had a higher cost. And we had some opportunities for national tenants to take the entire space, one store versus three stores or four stores

pay a high a lesser per square foot rent but much less cost. I didn’t have to demise it into multiple days. Well, we’re in the midst of doing that and working toward this redevelopment, and we got plans and there’s all going and boom pandemic hits. And our Restaurant Opportunities go on ice or service uses go on ice because there’s not a lot of expansion happening in that space in April May of 2020. So we were thinking about what to do, fortunately. And I think this is the key to the whole story. We had maintained good dialogue with the other potential opportunities. We had maintained an open line of communication as to what was happening with the opportunity and when And the world was in a bit of turmoil and restaurants were doing less expanding and service users were trying to get a clearer, more clear visibility of what was the future was going to look like. We went back to the opportunities we had for the entire box. Those were some larger organizations that had a vision of what the future would look like their businesses were strong. And we ended up reengaging AutoZone. The thing with that is, obviously the economics were totally different, still strong opportunity for us. But we were able to create some interesting opportunities from a non monetary perspective, to make the specific real estate deal pretty ironed tight, very investable, and we ended up working through it in the beginning of January of 2021. We eventually signed the lease with AutoZone. But that’s not the end of the story. I think the end of the story is that some of the opportunities that we had in the food and beverage space, have now come back to life, and food and beverage sectors on fire. And we’re now working with them in another part of the property that originally they weren’t looking at, because they wanted to be front and center on the pure one versus in line. However, that’s now not available. And again, we had maintained good dialogue and communication with those tenants who never went anywhere else in the market. And now those opportunities have resurfaced. So I think the punch line and the moral to this story is yes, whether you’re a buyer or seller in anything in business, keeping the dialogue going, keeping the lines of communication going, is paramount. Because until until the deal is inked, and even sometimes when it’s inked, you don’t know what will happen. You might get hit with a global pandemic, that changes the entire direction of the business opportunity. And when that happens, it is paramount that you have consistent communication so that if things do go off course, you’re not starting from scratch or wondering. And I think sometimes whether you’re a buyer or seller, you choose a direction to go, you focus on that, and you leave the dialogue on the opportunities past alone, or potentially close them. I think when that happens, you’ve put all your eggs in one basket, you can create a tough scenario if things don’t go the way that you thought. And then both buyers and sellers alike should think about that. And I think about Autozone in Lexington, Kentucky excited for their recent opening. Glad to have him in our shopping center. And that’s all I have for today, everybody. So have a great Thanksgiving. I hope you get a lot of time with family and friends. We have a ton of really exciting episodes coming down the pike I am so excited for was looking at the schedule of interviews, pretty pumped some cool stories, some cool thought leaders very excited. I want to ask everyone, for one favor in 2022. We’re trying to really grow this podcast, create new offerings to people and really make this a the best in class, retail, real estate or convergence of retail and real estate podcast. We also think that this is just a great place for people to learn about how different business deals transpire. And we’re having entrepreneurs CEOs just come on the show and talk about how different business deals actually go down. It’s a great place to learn outside of even retail in real estate. And one of the simple things that you could do to help support that and us continuing to bring this to the market is to rate and review the podcast, please. If you can take just one minute of time it doesn’t even take a minute to go on iTunes or your listing platform and rate and review us it would be greatly appreciated. Finally, if we’re going to be be launching something in 2020 to a retail retold, insider newsletter that’s going to go out, it’s going to give some exclusive content that’s not on this podcast. If you want to get access to that, please email us at marketing at DLC mgmt.com and we will make sure to get you on the list. And as that exclusive retail retold, insider content comes out, you will be notified and you will get the newsletter and what it will do that first, a wave of content is going to be an in depth business analysis of the pros and cons of certain things that happen in commercial leases from a business lens. So, okay, everyone. Thank you so much. I hope you have a great Thanksgiving. I’m hosting. I’m excited to host off the travel to many different places to sit, watch some football, enjoy time with family and play with my kids.

Very excited. All right, everyone. Thanks so much. Thank you for listening to retail retold. If you want to share a story about a retail real estate deal that you were a part of on our show. Please reach out to us at retail retold DLC mgmt.com This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you are a retailer, broker, entrepreneur, architect or an attorney. Also, don’t forget to subscribe to retail retold so you don’t miss out on next Thursday’s episode