Alliance has had a lot of success over the years by finding undervalued properties. In my experience, great assets are sometimes underpriced because they have an issue that scares away less experienced investors. Only 2-3 years left on the lease? Great! When the market perceives higher vacancy risk, fewer people are willing to buy. And of course, less demand means much more favorable prices.
Our experienced team is very good at assessing the real vacancy risk, and we’ve found some gems in properties that weren’t really as risky as they appeared to be. I shared an example of this in a recent case study. An attractive property had only a few years left on the lease, and the tenant was owned by sizable company with the ability to drive a hard bargain. The short lease duration and strong counterparty meant there was a risk of either a costly vacancy or having to accept a less-than-ideal new lease. These risks were enough to scare away many buyers.
We were not daunted by the risks, and lower demand for this property meant this great asset was available on sale. In my experience, much of the risk of a short lease actually depends on the skills of the investor / landlord / negotiator. Small or inexperienced outfits often lack the confidence to negotiate a (favorable) new lease with a big company. Big tenants will often try to use their weight to extract great terms that hold property value down. But our team has negotiated so many of these deals. We have a good sense of what the market will bear, and that breeds confidence. There’s just no substitute for an expert analysis team and years of negotiating experience in a chosen market.
At Alliance, we take an active approach to finding value. Find errors in the market, buy at a good price, and change the property profile to make it as appealing as possible. There are many sources of underpricing in the market, including short lease durations. In those cases, negotiating a new long term deal is one way that we can create value for investors. As soon as the ink is dry on a new long term lease, a formerly “risky” and unwanted property suddenly looks attractive to a wider world of buyers. The price goes up, and profit usually follows.