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The Real Estate Lesson of Radio Shack

Radio Shack filed for bankruptcy recently, and announced that it would close 2,400 stores.  They fell prey to technological advancement that they were ill prepared for, and thus could not offer customers compelling value. The lesson one can infer is that tastes change, technology changes, and thus companies that once were dominant ultimately fall away.  I read recently that nearly 90% of the companies listed in the Fortune 500 in 1955 no longer exist.  This doesn’t surprise me at all.

I began my career in finance, and later migrated to real estate.  In short order I came to appreciate how wonderful real estate was as an investment class.  While companies come and go, the real estate that they occupy, if well located, will remain valuable and will house the next companies that come along to fill the void of the exiting company.  The key phrase to take into account, however, is “well-located.”  Too often I’ve seen investors, especially less-sophisticated, non-institutional ones, fall prey to the seeming attraction of the name tenant that might occupy an entire property, such as a Radio Shack store, and completely overlook the actual viability of the real estate location itself.  By focusing on the lease to the tenant instead of the viability of the real estate itself, this investor is now actually making an investment in corporate credit, missing out on the true benefit that real estate provides.

A wonderful example of this benefit vis-à-vis corporate risk is the flagship Abercrombie and Fitch store on Fifth Avenue in New York City, in what is possible the nation’s most expensive area for retail real estate.  Given the history of fashion companies and the constantly changing public tastes, it is not unreasonable to expect that one day Abercrombie and Fitch will cease to exist.  Investors owning their stock or bonds will suffer mightily, however, the owner of the store they lease on Fifth Avenue will do just fine.  That space, with its super-prime location, will surely attract whichever company is hot and growing at that time.  Conversely, the owner of a Radio Shack store in an off-the-beaten-path location will likely have a hard time finding a new tenant today.  His investment might be worthless.  In the end, well-located real estate trumps corporate risk as a long-term investment.

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