Iron Peak Properties Acquires Neighborhood Retail Center in Sedona

Iron Peak Properties is proud to announce the acquisition of a new property in Sedona, Arizona, a neighborhood retail shopping center, now owned by Iron Peak Red Rock, LLC. This type of product is in high demand right now and experts believe it will do exceptionally well in the coming years. The property is located directly on Hwy 89-A in Sedona, Arizona, surrounded by grocery stores, restaurants, and hiking trails, making it easily accessible to residents and tourists alike.

One of the key factors in this acquisition was the favorable terms negotiated with the seller, including seller financing. This allowed Iron Peak Properties to double cash flow compared to the current terms offered by traditional financing, providing an even more significant return on investment.

The property also boasts a number of desirable features, including long-term leases, under-market rents, and a coveted drive-through anchored by a franchised smoothie shop, making it an attractive option for both tenants and investors. Unlike the traditional 3-5% annual rental increases, the leases on this property increase according to the Consumer Price Index (CPI), which was 6.5% for 2022 and 7% for the year prior. Additionally, the rents on this property are currently below market, providing even greater potential for increased income in the future.

The asset class is known as a “neighborhood retail center”. Bob Fraser from Aspen Funds and Parker Webb from FTW Investments explain, “these are your very small little strip malls that have nail salons, dog groomers, bars, and those kinds of things, and they did super well through COVID”. They are not anchored or they are shadow anchored (e.g. an adjacent grocery store that is not on the subject property). They also do well during recessions. Whether there’s a recession or not, you still need to get your haircut, pay your taxes, and you definitely need to go to the liquor store.

Despite the strength of this asset class, the cap rates are still high in the 8-9% range, in fact, incredibly high when compared for example to the darling of real estate, multifamily. A low cap rate means less cash flow, so while a multifamily property might be sellable at a low cap rate as well, the upside is now focused on appreciation (forced or natural) versus in place cash flow, and that involves at least some element of speculation. In contrast, Iron Peak Properties only acquires cash flowing properties with room but not necessity for operational improvement, and thereby forced appreciation. 

So why does this asset class have a high cap rate if it’s recession and pandemic resilient, provides room for increased rents, and is immune to the e-commerce revolution? 

Bob and Parker say, “There’s a disconnect between capital markets and the property market. The property market is performing well, but the capital market is still discounting on price. Why? What they’re doing is they’re looking at retail data as a macro. If you look at retail data as a macro or on an average, you see this decline, but the issue is all that decline happens to be in those sub-segments. It happens to be regional malls and power centers. If you look at the niche of small neighborhood centers, they kill it. It’s their niche, but they’re getting painted with the broad brush of global retail.” (Interestingly, the other asset class where this is also the case is multi-tenant industrial, Iron Peak’s favorite asset class. Reports discussing oversupply of industrial real estate are really referencing big box, which is entirely independent of the small bay units that are consistently full in good times and bad.)

The location of this property on Hwy 89-A is also ideal, connecting Sedona to the growing cities of Flagstaff, Cottonwood, and Prescott, as well as providing easy access to Phoenix via Rte 179 and the I-17. This makes it a great destination for tourists and locals alike, providing a steady stream of customers.

In conclusion, Iron Peak Red Rock is an exciting addition to the Iron Peak Properties portfolio. With its favorable terms, value add opportunity, and prime location, this property is expected to be a profitable investment for years to come. We are confident that this new addition to our portfolio will provide long-term benefits for our company and our stakeholders.

Iron Peak Properties is now headquartered in Phoenix, Arizona! If you’re in the Phoenix area and would like to get together, reach out to us to connect. We love to talk shop with other real estate investors, and who knows, we may even take you to our favorite smoothie shop in Sedona. We heard the landlord is pretty cool.