When Bad Things Happen to Good Properties

To restate a favorite quote from Howard Marks’ book, The Most Important Thing, “Investment success doesn’t come from buying good things, but rather from buying things well.”

To that end, Hochberg’s view on investing, in retail properties as well as in other asset classes, is to avoid problem properties. The great challenge, however, is that regardless the amount of due diligence, sometimes bad things—the bankruptcy or failing financial performance of an anchor or substantial retailer—happen to otherwise good properties.

The key according to Hochberg, is to acquire properties in desirable locations, have liquidity from property or portfolio operations to explore other options, and, experience a little luck in delivering solutions when bad things happen. Next Realty has been very fortunate and benefitted from location, liquidity and a little luck to overcome challenging situations at properties originally bought well.

Niles Community Retail Center

An entity of the Hochberg family has owned the 120,100-square-foot community retail center at 7233 West Dempster Street in Niles for approximately 50 years. This center was the home of the first Sportmart, the sporting goods retailer that was formed by Larry Hochberg and Sanford Cantor. For most of that time the center’s primary anchor tenant was a 60,000-square-foot Sportmart, or its successor, Sports Authority, which shuttered all their stores including the Niles location in 2016.

In the wake of that departure, Next repositioned the entire center leveraging its relationships with existing tenants and within the industry overall, as well as capitalizing on the location of the center. With creativity and flexibility, and in a reasonable time period, the Next team completed a series of transactions that included the relocation and expansion of Big Lots (32,058 sf), a tenant of the center since 1995, and the welcoming of new tenants Harbor Freight Tools (14,500 sf), Hobby Lobby (45,850 sf) and Little Caesars Pizza (1,710 sf).

Ultimately, the Dempster Street center reached high occupancy and further diversified the tenant mix.

Lincolnshire Commons

Lincolnshire Commons is a 133,000 square foot lifestyle center with a diverse mix of medical office, restaurants, fashion shops and convenience retail. The property was built in 2006 by General Growth Properties and acquired by a Next Realty joint venture in 2014. At the time of acquisition, major tenants of the center included Barnes & Noble, The Cheesecake Factory and Fleming’s.

The property was acquired with the knowledge that this Barnes & Noble location represented one of the weaker performing stores for the national retailer. Rather than waiting for the likelihood that the tenant would eventually close that store, the joint venture acquired the well-located asset with the intention of replacing the underperforming tenant and repositioning the asset.

Ultimately, through intense negotiations with Barnes & Noble, a replacement tenant and the Village of Lincolnshire, Next Realty completed a long-term lease to NorthShore University HealthSystem. As a result, the Net Operating Income increased significantly to substantially increase the value of the asset.

The property continues to generate what is believed to be an attractive yield for investors.