Back in 2007, I helped Adel sell her house near Beverly Center. It had been a second home for over 40 years, and was bringing in $1,000 a month in rent. To increase the rent she would have had to spend $50,000-$100,000 remodeling, as it had been worn by various tenancies over the years. Instead, she decided to sell the house. We sold the home for around a million dollars and the next step was to execute a 1031 tax-deferred exchange.
We investigated and found numerous types of investment property. Many were at crazy prices and cap rates. Adel settled on a property located in Kearney, Nebraska, which consisted of an approx. 20,000 sq.ft. lot with a new Starbucks on it. The deal was great, with a 20 year lease, annual increases and a 5% cap rate. The escrow closed without a glitch. However, six months into the deal, Starbucks decided to close hundreds of stores nationwide, and this was one of them. They offered Adel one year’s rent or a law suit. She took the year’s rent and put the empty store on the market. I guess Starbucks made a mistake, because the store leased up at an increased rent and she came out okay.
I would venture an educated guess that most of the owners of Starbucks Coffee locations that were closed did not have the lady luck of Adel. They are probably sitting vacant today or leased at a much lower rate to a not so credit-worthy tenant. Another lesson learned is that a triple net lease (guaranteed by a national credit worthy tenant) is not worth much if they don't want to stay open and pay the lease. The cost to enforce the lease was probably calculated into their offer of a year’s rent as the legal fees would be a major burden on a small time property owner vs. a big corporation.
With the changes the Internet has brought we have seen various prominent corporations disappear overnight. The most outstanding story is that of Blockbuster video. Can you find one? Of course not, as it is now a Netflix world. What an amazing deal. I go online, create an account and I can stream movies on my home computer or TV. They will also mail DVDs within 24 hours with no late fees, and I can hold it for as long as I want. Unlimited movies for $10 a month. Goodbye Blockbuster, goodbye Hollywood Video.
The real estate story is that there are no more Blockbusters. I have seen the ones in my neighborhood turned into a small market, a bank or a variety of other retail uses. How many people and companies executed a 1031 exchange into Blockbuster and Hollywood Videos thinking they had a golden goose tenant for the next 20 years?
In most cases, the buyers of these $500,000-$2,000,000 properties are small investors that hit the jackpot on their up-leg only to exchange into a dream that quickly turned into a nightmare. Most of these small investors put their life savings into the deal. Much of the time it was their only property aside from their home.
So, the big question is: who's next? Who will be the next victim of the Internet and web shopping? I think this is a bigger problem for the retail property owner and office building owner than might be considered. Have you seen your local Barnes & Noble lately? How about Borders? They will be the next casualties of the Internet boom. I was a member of the Barnes & Noble book club and went online to buy a book. Even with all of the B&N discounts, I found it for 50% less on Amazon. Goodbye Barnes & Noble. I will never shop there again. Don't you hate when you are price gouged as a customer? I do.
In times of economic chaos, even wealthy people look for deals. Groupon is selling discounts on everything from exercise classes to restaurants. A few months ago, Groupon turned down $1 billion from Google. Open Table is a new online marketing service for restaurants. I have made many dinner reservations at Los Angeles and Beverly Hills top restaurants, and then they offer flowers delivered to your table and discounts on limousine service for the night. A one stop shop that will turn any guy into an instant Romeo.
What will be the next innovation in the technology revolution? If I were to guess, Fry's and Best Buy are going to be under pressure. Go online and shop for a TV, computer or any other electronic device. The deals are amazing.
What is surprising is that companies like UPS and FedEx are having a tough time with the economy. I would think that with more commerce being shipped direct to the consumer that those type of companies would flourish. But so far it’s not the case. I think that with some management and logistic modifications i.e "cost cutting", those two companies will be okay and become more efficient. We shall see.
For the record, as email, texting and twitter continue to be the method of choice for communication, letters and mail has declined and the U.S. Post office has suffered greatly. Printers have suffered too as you can make an invitation online and email it to your guests. It will be interesting to see if there are economic effects for companies like Kinko's.
As you ponder the effects of the Internet on your properties and tenants, it can become frightening! But if you prepare for possible outcomes and have a plan to be diverse, the damage can be minimized and you may even come out ahead of the game.
