NUBY SEARS : Finding Centers of Interest : Real Estate Veteran Specializes in Shopping Areas

Many people stumble around a little before finding their life’s work. Not Nuby H. Sears. He was born to sell real estate.

Sears started in the residential real estate business at age 19. He switched to selling commercial properties at age 24. And today, at 32, Sears operates his own firm, HMS Equities, from a swank office building in Newport Beach, just a few miles from his home.

HMS, he explains, stands for his real name, Hal Marshall Sears. Nuby is a nickname.

Sears specializes in selling shopping centers. Despite the recession, he said,there are still plenty of sales occurring. The value of the shopping centers he was involved in buying or selling last year topped $56 million. This year, he hopes to do even better.

Optimistic? Sears is so bullish that every telephone caller to his office is greeted by a receptionist who says, “It’s a great day at Nuby Sears’ office.”

A 15-year Orange County resident, Sears was formerly a senior marketing consultant for Grubb & Ellis’ Newport Beach office. He is also president of Y2000, a charitable group that raises contributions to support Santa Ana’s YWCA Hotel for Homeless Women.

Real estate is never far from his mind. When Sears goes on weekend bicycling trips, he says he detours along the way to inspect shopping centers.

He was interviewed in his office by Times staff writer Chris Woodyard.

Q. Why do you feel there is tremendous opportunity for shopping center investors right now?

A. The market is full of opportunity because many investors are shying away. They think the risks are too high. But in reality, there is opportunity on a selective basis to get better returns on investments than in the last few years. There is risk, but the secret is to evaluate your risks and ensure that you will be compensated by a healthy, growing income stream. That means you are making money.

Q. What do you mean by a healthy, growing income stream?

A. I’m talking about a certain segment of the market, about 10% of the centers available. In retail shopping centers, you’re buying real estate. But more importantly, you’re buying an income stream, which is all the rents a landlord receives from the tenants in a center after deducting the expenses. That income directly depends on the success of those retailers. And at many centers, the tenants are collectively quite successful in spite of the recession.

Q. With the recession, isn’t business lousy right now?

A. In some centers. But there are some locations where sales volumes are good. These locations are protected from competition, experiencing housing growth in the area and the tenants’ sales volumes are high enough to where the rent they pay is a small percentage of their gross sales. Where the risk comes into play is where the tenants’ operating costs--rent, common-area expenses, for example--are so high that they put a risk to the income stream to the landlord.

Q. Do these centers offer a good return for investors?

A. These are the centers that trade at the lowest returns, but returns are still up today compared to where they were two or three years ago. The return the investor gets is called a ‘capitalization rate’ or cash flow. That’s the net income divided by the sales prices. This would be similar to investing your money in a bank where you received a 6% return. You can go out today and buy quality, secure shopping centers that provide secure cash flows. They might be traded at a 9% return today where a year to two ago they traded at a 7.5% return. Interest rates on mortgages were higher a year or two ago. Now interest rates have come down. There is more cash flow to investors. That makes a most opportune time to buy. Returns have also moved up because we’re in a recession. There is less competition among buyers because there is a perceived additional risk.

Q. Aren’t the best properties already selling for top-dollar prices?

A. Well, they are. Those prices really haven’t come down that much, but three years ago there were very few quality projects for sale. Now you can buy what I almost consider the best of all shopping centers. You can go into certain locations where there is little room left to build new centers and buy an existing center. The inherent growth in surrounding residential neighborhoods means that retailers will see a continuous boost in their business.

Q. Where is the best shopping center potential in Orange County?

A. I think South Orange County, which has experienced a lot of housing growth and is strictly zoned, is a great place to invest. However, I think that’s the location where the rental rates are the highest. I think there are some tenants who went into some of these centers over the last couple years and negotiated leases that are too high given their amount of sales volume. That adds to the center’s potential short-term risk. But the long-term opportunity as their sales grow, with the prospect of limited competition, should make those centers very profitable.

I also like Santa Ana. I think Santa Ana is experiencing a bonanza in population growth. You have among the highest population densities in Orange County. The demand for consumer goods there is fueling growth in retail. There are shopping centers in Santa Ana where the retailers are probably more profitable than those in Mission Viejo.

Q. So, you think that South Orange County has too many retailers?

A. No, I don’t think South Orange County has too many retailers. Maybe the rental rates have been pushed up so high that some retailers might be experiencing difficulty, but if you compare the sales volumes to, let’s say, Huntington Beach, I think you find the sales per square foot is higher. But, of course, Huntington Beach is still a dynamic market.

Q. Your bullishness about Santa Ana raises the question of whether there are some older areas that are getting overlooked by retailers just because they might not expect income levels to be as high as in other parts of the county.

A. Well, the income levels might not be as high but housing is less expensive. You have to look at disposable income and population densities. You could have 10 affluent shoppers at one shopping center, and another center might have 30 less affluent shoppers who are spending more total dollars.

Q. So overall, you think Orange County is still a great place for shopping centers?

A. We are experiencing population growth, which is really the fundamental behind a retailer’s success. Overall, the market is healthy. There are some properties that are suffering vacancies and maybe where the rental rates are a little out of equilibrium, but over time that’s going to adjust itself. The landlord is a partner with a shopping center tenant. The landlord wants the retailer to be as successful as possible.

There is that marriage in a shopping center that is unique. Other investment vehicles don’t offer that. You take an office building: All you need to do is change your phone number and you can move from one building to the next. There’s very little tenant loyalty. But in a shopping center, you have a business with a developed customer base. People are used to coming to a particular store. You have a more stabilized income stream because a tenant isn’t likely to move down the street. That’s an inherent benefit in retail.

Q. How are shopping centers that charge high rents trying to help retailers?

A. Actually, a lot of neighborhood shopping centers are being designed more efficiently to maximize use of retail sales space. The depth of the stores is designed to increase the tenant’s business as much as possible.

Q. Are different kinds of businesses attracted to centers that charge high rents?

A. I think you’re seeing more of a service-oriented tenant who can afford to pay the higher rents. The margins and profitability are higher than for a retailer.

Q. What kind of services are you talking about?

A. Hair salons, dry cleaners, take-out pizza, mailbox services, etc. Those are examples of service-oriented tenants who might be able to pay more rent than a clothing store or a shoe store, for example. But you need to have an adequate mix of retail. What you want to create in a center is a one-stop shopping environment where the supermarket brings the customer once or twice a week and the small shops benefit from the traffic generated by the anchor tenants. So you don’t want to bring in a customer and not offer the goods and services that they need when they make their weekly or twice-a-week trip to the supermarket. You want to maximize your benefit from the customer count.

Q. What kind of centers do you find are most popular right now and pull in the highest sales prices?

A. The typical neighborhood shopping center, anchored by a high-volume supermarket in the plus or minus 40,000-square-foot size range. And a corresponding drug store that is successful. That brings in as many as 20,000 people a week to a shopping center. And maybe you would like to see 35,000 square feet of shops and some “pads,” which are the stores and restaurants built apart from the main center. That kind of center is the sweetheart of pension funds and institutional investors.

Q. How would you define a ‘power center’ and what do you think of them as a retailing concept?

A. A power center would be a Wal-Mart, Pace, HomeClub, Circuit City, Marshall’s, for example, with some or all of those as anchor. You create a powerful draw by congregating as many of those kinds of retailers as you can in one location. It provides synergism all around.

To build these power centers in Orange County, you need a large parcel. There is not a lot of available land left for these power centers, so some are going in outlying areas like the Inland Empire.

I think that power centers are very exciting. We’re seeing some sales volumes for power retailers that are terrific.

Q. Given the success of these power centers, what do you think it means for the future of the enclosed shopping mall?

A. I think the mall and the muscle of the department store can compete with the prices of the power centers. The mall still provides an attractive shopping environment and a diversity of retailers. The malls become the meeting place.

Q. Will they still hold the medium- and high-end apparel market?

A. I think so. I think malls will be successful, particularly in Orange County. We have some very successful malls and there just is no land left to compete with them. The power centers are going to take some sales away, but the market is strong enough that they can both survive.

Q. What about strip centers? Are they still being built?

A. When you talk about strip centers, let’s define that as a center that doesn’t have a supermarket or a drug store. It’s really a corner convenience center. If they are well located and at high-traveled intersections with good ingress and egress, I think that those centers will thrive. Some of the centers, however, have been built in secondary locations, which might be experiencing difficulty in today’s market.

The smaller strip centers can be hard to finance now that savings and loans have stopped lending for commercial properties and there is a shortage of lenders to finance the smaller properties. Life insurance companies have stepped in to fill some of that gap. The down payments are higher, so strip centers are a little harder to sell but are still viable.

Q. How are investors financing these shopping centers with such a terrible financial market?

A. There is no money available where the perceived risk is greater than the perceived opportunity to earn a return. Lenders have reeled in. They say, ‘We’re assuming more risk than we are willing to take on by lending on this property and we’re going to pass because there’s more opportunity to lend over here with the same yield but less risk.’ Also, some lenders in their evaluation of a property are assuming that rents will stay flat for the next five years. That makes their appraisals very conservative, which, in turn, means they will loan less money and the buyers will have to put more cash down. There is plenty of money available where there is a secure income stream and lenders are willing to compete against each other to upgrade their portfolios. They want to invest in the best retail properties.

Q. Most of the trading in shopping centers, then, has been in those centers that are considered safe bets?

A. Exactly. There were not a lot of good properties available two or three years ago and those that were available were trading at really high prices. We have returned now to a normal, healthy market. In most every deal I did last year, I was competing with several other offers.

I think every transaction has to be a win-win. The seller has to benefit by receiving a respectable price and the buyer has to benefit by making a secure investment in a center.

Q. It sounds like landlords have come to realize there are very high transactions costs in losing shopping center tenants?

A. Yes, that’s true. And landlords in today’s economy want to retain as high an occupancy as possible and keep their existing tenants. In some centers, they are not raising rents. In others, they are giving away free rent in the first few months of occupancy.

Q. Are Riverside and San Bernardino counties beginning to look better than Orange County in terms of retail opportunities?

A. I still think Orange County, when you look at taxable sales and retailers’ choice of where they want to be, is the place to be now. There are also opportunities out there in the Inland Empire. But typically properties there would trade at a higher return than properties in Orange County. The buyer would want to be compensated for the additional risk of investing where there might be more future competition.

Q. It sounds like buyers of the shopping centers now are positioning themselves for a turnaround in the economy.

A. I think so. The smart money is buying today.

Q. Is it better to invest in a new shopping center or an established one?

A. If you buy into a new shopping center, you don’t have any tenant history to see how the tenants are performing. It’s really guesswork. I think there is more risk and it would probably be better to buy into a center that has several years of seasoning. Your ability to predict the future is predicated on what has happened in the past.

Q. In summary, what should an investor look for in a shopping center?

A. You look for location, where the center has successful tenants that are doing a good business. For the shop tenants, you generally want to see rents that are 10% or preferably 6% of their gross sales. The more sales they are doing in relation to the rent they are paying, the more successful the center will be and the landlord will have more security in his leases and resulting cash flow. And you want to look for what opportunities there are for somebody to build a better mousetrap down the street and take business away.