The Re-Up
A podcast about the business of raising and allocating capital in private markets. In private markets, a re-up is the decision to recommit — the ultimate signal of trust. Hosted by Katie Fasken of August Advisors.
The Re-Up
Brian Kosoy from Sterling Organization on how retail became investable again
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Brian Kosoy is Managing Principal and Chief Executive Officer of Sterling Organization, which he co-founded in 2007 — a vertically integrated retail real estate firm, and one of the 10 largest private owners of shopping centres in the United States.
He started the firm directly into the financial crisis and spent the following fifteen years in a sector institutional capital was abandoning. Sterling now owns more than 80 centres across 14 to 15 million square feet.
Katie and Brian trace how retail arrived where it is — from the department store to the category killer to the smart phone — and where the growth is now: legacy grocery leases well below market, small shop rents with room to run, and boxes coming free for the first time in decades.
They also talk about why he believes that, by and large, cap rates on institutional-quality real estate assets follow capital flows rather than interest rates, and why he thinks his LPs are more his bosses than limited partners.
About Our Guest:
Brian Kosoy is Managing Principal and Chief Executive Officer of Sterling Organization, which he co-founded in 2007. Sterling is a vertically integrated private equity real estate firm investing in retail and consumer fulfillment assets across the risk spectrum in major markets across the United States. The firm owns more than 80 shopping centres across 14 to 15 million square feet, and Green Street* ranks it among the 10 largest private owners of shopping centres in the country.
Originally from Toronto, Brian moved to the United States for law school and practiced in New York City, primarily representing retailers on lease transactions across the five boroughs before moving to the investment side. He sits on and chairs the investment committees for all of Sterling's investment vehicles.
*Source: Green Street Retail Outlook Report, January 2026
The Reup is a podcast about the business of raising and allocating capital in private markets. In private markets, a re up is the decision to recommit to a manager's next fund. The ultimate signal of trust. I'm Katie Faskin, founder of August Advisors, and this show is built around that conversation. The managers, allocators, and ideas worth coming back to. For years, retail was the asset class, institutional capital was leaving. Now the money is coming back. My guest today has been buying shopping centers the entire time, and he thinks the sector is still mispriced. Brian Kasoy is managing principal and CEO of Sterling Organization, which he co-founded in the summer of 2007, directly into the financial crisis. Sterling owns about 80 shopping centers across 14 to 15 million square feet, and Green Street ranks it amongst the 10 largest private owners of shopping centers in the United States. This year, the firm is on pace to buy roughly a billion dollars of centers and sell about half a billion. Brian grew up in Toronto, moved to the U.S. for law school, and started out representing retailers on lease deals across the five boroughs of New York before moving to the investment side. We talk about how retail actually arrived where it is. The death of the department store, the category killer, the phone, the overbuilding, the crisis, the apocalypse narrative, COVID, and why he believes we're a few years into a long stretch of rental growth or a rental rate super cycle, as he says. We get into where that growth comes from, legacy grocery leases at $12 a foot in markets clearing north of 30, small shop rents with room to double, and what happens to a box when the tenant runs out options. We also talk about why he thinks cap rates are set by capital flows rather than interest rates, why big capital can't move into the sector quickly, even when it wants to, and what makes an investor re-up over multiple decades, which for him comes down to treating LPs less like partners and more like bosses. Here's my conversation with Brian Kasoy. Hey Brian, thank you so much for joining me today on the re-up. Let's get started. Would love for you to walk through an intro and quick background on yourself and originally kind of what drew you to the retail asset class.
SPEAKER_00It's great to be here, Katie. Thank you for having me. Background on myself. I know you're sitting up in Canada and I'm down in the States. I did grow up in Canada. So I'm originally from Toronto and then moved to the U.S. for law school. Practiced law in New York for a little bit with a focus actually representing retailers in the five boroughs of New York City. So if you were a big retailer, the law firm that I worked at, we were representing you mostly on lease transactions around New York City. Ultimately got a job at a real estate firm doing a little bit of everything and then was drawn to retail due to the background, due to sort of non-commoditized nature of the business. It's definitely specialized. And the reality is once we started raising institutional capital, really got pigeonholed as a retail guy for endowments and foundations. And I'm a big believer that real estate is really the capital business. And if you don't have capital, you're not going to make money doing real estate. And if you do, then you will. And retail was what I could get capital for, which is interesting because while I was getting capital for retail, not a lot of people were. That story's definitely changed today, which is why I think you've invited me to join you today.
SPEAKER_01And so you mentioned that at the time you could get capital for retail. Over the last 20-ish years, people haven't. Today, people still can't, despite the fact that it's an attractive asset class. Through those hard years, what made you committed to the sector?
SPEAKER_00Well, I think a few things. Number one, once again, it's what we did and what we know. I think we were building a specialty, no doubt. It is a specialized asset class. It takes specialized operational capabilities and relationships that are really important. I think as time went on, we just had our head down and kept doing what we were doing and stayed focused and disciplined. But a lot of our competitors went by the wayside. So either gave up, decided to go into industrial or multifamily, maybe not real estate at all. And at some point we picked our head up as one of the few remaining pure play, vertically integrated, institutional quality, private equity, retail-only asset managers in the U.S. And we like that position. We were happy playing on a field that there were very few players and leveraging our operational capabilities, our relationships, our experience, which really does matter in retail. I'm a big believer that if you are going to play in the retail field, you need to be specialized and you need to be vertically integrated. If you are going to add alpha, there's no doubt that today, the last couple of years, and I think going forward, for you know, the next five to ten years, there should be a lot of beta in the space. For a long period of time, there was a lot of negative beta, and we needed to add alpha to sort of counterbalance that. And I think the only way you do that or we're able to do that was being a pure play operator, bottoms-up organization.
SPEAKER_01If you talk about retail being all you know, but it's had many iterations through the past decade where you've you've specialized on it. We've talked about the depth of the department store, retail apocalypse, COVID. Can you just walk through the different evolutions of retail over your career?
SPEAKER_00Well, I would say I like how you refer to decades. So clearly indicating my age. So now that I am in my 50s, I've been able to observe retail for many decades. I think what's interesting about retail compared to maybe industrial or multi or you know life sciences, is everybody does believe that they're a retail expert because everybody has spent their entire life shopping. And so when you go back to how we ended up where we are today in the US, and I think Canada is not too dissimilar. There are some nuances, but it's not too dissimilar. I think you really have to go back to, you know, where we were in the US or Canada when I was a kid. And so as a child of the 80s, you know, TV shows and life revolved around the mall. And the mall, the big enclosed mall with the department store anchors, drove retail in the 80s, probably the 70s, even. That's a little older than me. And the question is why, right? And so retail at that point was driven by department stores. And so you had massive retailers that had departments in department stores. And so you would go into a department store as a child, at least I would. And your department store would have actually departments. It would have not just clothes and makeup, which is sort of what's left in them today, but you would get your bike in a department store. You would get a TV in a department store, you'd get a bed in a department store, you'd get linens in a department store, you'd get, believe it or not, your office supplies or school supplies in a department store. And so it had lots of departments. And that was the anchor that drew people to the mall primarily. And then you had the smaller shop space in the mall. And why did that exist? It would draft off the department stores. One. And two, back then we needed to go to the mall to see what the world had to offer. And as a child in the 80s, and I grew up in Toronto, the mall I went to was Bayview Village, which I think is it's still there and actually thriving. It's a small mall, but the demographics are great. And I would go to the mall for what? To discover what the world had to offer. Right. So it was not just the department store. It was you'd hang out to see friends in the mall. You would see what was offered at stores. So I would go to Sam the Record Man so I could understand what the top 30 songs were at the time. There was an electronics store called Pangos Electronics, which, you know, they sold Walkmans, and I would see what the coolest new item was there. We'd go to, you know, play video games at the arcade. We'd see other kids. And so there was this whole social part and view into the world that took place at the mall as well. And it was a thriving vehicle for retail. In the 90s, is where things started to go a little bit sideways, particularly in the US. Someone came up with the idea of the category killer, which was how do we get specialized stores out of the mall or departments out of the mall, offer a bigger offering at a cheaper price, and in a more convenient way to shop, right? So how do I get in? How do I get out quickly? How is it a cheaper package? Maybe the stores aren't built out as well. They're not air conditioning. They don't have Santa. And, you know, and the Home Depots and the Logas of the world started, you know, for hardware and that pulled hardware out of the malls. The Office Depots, Office Max, Staples started, and that pulled the office supplies out of the store. And Best Buy and Comp USA in Circuit City pulled the electronics out. And linens were pulled out by linens and things, and Bed Bath and Beyond and Anna's Linen. And the list goes on and on, right? And so all of a sudden the department store got gutted. And so those anchors that drew people to department stores started to have challenges. And we see today how many department stores are left, how well they do, and clearly challenged. So it was harder for the small shops to draft off of those anchors. Able to do it and survive, but not really thrive. And then we have the advent of the phone. And the advent of the phone really changed the need for a mall. My kids don't need to go to a mall to discover the world. They can figure out on their cell phone what the top 30 songs are. They can figure out on their cell phone which shoes are cool that they want to buy. And they also don't need to go to the mall for socialization. They actually can unfortunately do that on their phones sort of as well. And so the inside of the mall was no longer a thriving, you know, vehicle either. And that all came about sort of in the early 2000s. In the US, what we did was we took these departments and we created power centers and we built them across the US, these massive anchored power centers for the most part. And there was a race. Wall Street wanted as many stores as possible. They were much more focused on top line, not bottom line, not too dissimilar to sort of venture that you see out in the Silicon Valley. And they believed that the winner was the was going to be the retailer that had the most stores. So if Office Depot, Office Max, and Staples, the winner was going to be whoever had the most stores. So they threw up as many stores as possible. Developers were willing to develop for them. And then when the GFC hit and leverage went away and cheap financing went away and the consumer went away, and all of a sudden the bottom line became important, the large majority of those retailers went out of business. And we no longer needed three in each category. We needed zero, one, max two. And the US landscape was littered with empty boxes and vacancies, particularly the suburbs, which is where most Americans live in major metropolitan suburbs. And that was sort of the beginning of very difficult times. And that would start in 2007, 2008. We started Sterling in 2007, the summer. So our our sort of entree into this market was right into the face of the GFC. Obviously, the GFC, you know, lasted quite some time, most people would say four to five years for retail beyond the overbuilding. We then had the internet, Amazon arrives on the scenes, 2013, 14, 15. And now we have the retail apocalypse. Everyone believes, and the you know, the narrative is that no one's ever going to go to store again and everything's going to happen on the internet. And so we have to work our way through GFC, then the retail apocalypse. As the economy grows in the US and people continue to spend, even though the growth on the internet is far more than in the stores, and the population continues to grow, which is the beautiful part about America, is that we constantly have a growing economy and a growing population. As that starts to fill in all of that space that was overbuilt in the early 2000s, and we started actually pulling soft goods out of the department stores. Those are sort of the last category with the likes of the discounters, the Ross Dress for Lesses, the Marshalls, the Burlingtons, the TJ Maxx's, right? That sort of filling in specialty grocers, COVID hits and nobody leaves their house. And again, you know, there's net there's not a reason for a shopping center. And so once we worked our way through COVID, and dependent on which state you were, how in, how quickly you worked your way through it, you sort of picked your head up in about 2022 and had 15 years of, you know, major, major just, you know, headwinds of the most ludicrous nature in our space. And the world changed in 2023. There are bright skies ahead, and we're excited to be positioned where we are because we, again, are one of the few survivors to bring us to where we are. And so I know when people say, well, how did you get to where you are and where is the retail world? Most people don't expect a story to start in, you know, the 1980s and end in 2026. That is really the length of that's really sort of the beginning to where we are today.
SPEAKER_01So just going back to 2007, 2008 for a second, did you understand you were living in this sort of death of the department store era? And did you stay away from enclosed malls or as an institutional investor? Like how did you survive all these different headwinds? A little.
SPEAKER_00I think at the back then we viewed the mall business as a fundamentally declining business, right? There was a shift in the way people shopped. And I think in 2000, there were about 2,000 malls in the US. Today there's about a thousand. So when you have half as much of a product, it's clearly in structural decline. We viewed malls at the time as sitting on some great real estate. And were there opportunities to repurpose or redevelop? We definitely did that on a couple of occasions. I think that that's a tough business. It's just a complicated business. We had some that worked out great, some that worked out okay. But I think what we've sort of determined is there's nothing sexy about what we do. There's nothing sex about we want to do. Our focus is on generally anchored open-air shopping centers. And by that, I mean grocery anchored shopping centers, which is all about necessity-based goods, right? It's where do you get your groceries? And then a lot of things that are internet resistant. It's service-based, it's food-based, it's fitness-based, it's medical-based. So if you go to a grocery-anchored shopping center today, a typical one, you're going to have your grocer and then you'll have a nail salon, a haircutting place, uh, Pilates place, uh, Chipotle, and maybe sort of uh an ER or a chiropractor or a dentist. It's a lot of service, a lot of stuff you can't get on the internet, quite different than what you would have seen in that shopping center when I started in the business, you know, over 25 years ago, where you would have, you know, a Hallmark store, a blockbuster video rental, just a lot more goods that you would leave with. And so our focus is on these necessity-based, internet resistant shopping centers that are grocery anchored, and then power centers. Those are the two major categories, I would say. Today it's 90% of what we do. It's all about necessity and value goods in suburbs of major markets. And so we think it's very defensive. The rent rules today are well below market. Perfect example is the average grocer in our portfolio. And we do have about 80 shopping centers in our portfolio between 14 and 15 million square feet. We're one of the 10 largest private owners of shopping centers in the United States, according to Green Street. Our average grocer rent is $12 a foot. These are legacy rents, these are legacy leases. Today, if you're going to do a grocery deal in the U.S., the rents are going to be north of 30 to justify the cost of doing them. We are doing a deal right now in Phoenix, so not the highest rent market in the U.S. at $39 a foot. And so super defensive. And what we also see is in the power center space, if you look at our sort of box rents, the junior anchors, the Marshalls, the Dicks, the Ross's, the LA Fitnesses, the, you know, the office depots of the world, those boxes on average in our portfolio are about $12 a foot. And those deals today are getting done well into the 20s. And so we have a very defensive sort of rent roll today across the country, which is really the first time we've seen it, at least last few years, in well over a decade.
SPEAKER_01You talk about the the legacy rents of grocers. Can you touch a little bit when you think about a grocery anchored strip center, just the duration of those leases and how often you're kind of renewing them? And or maybe even like where that value add comes from. Is it the grocers? Is it the inline shop tenants? How do you how do you outperform in that sector given the legacy of those large leases?
SPEAKER_00I think much like the malls of yesteryear, the grocery anchor shopping centers, anchor is the grocer, right? And the grocer is there kind of a loss leader. Their lease structures typically are about 60 years, right? They were originally done with a 20-year lease and a bunch of options that get them to 60 years, eight, five-year options. Where we're focused is buying dense infill locations in major markets. The majority of the shopping centers we buy, the grocery anchorage shopping centers we buy, were probably built in the 1980s, maybe the 90s. And so you start to think about 80 plus 60, 2040s is when they're up. Those leases are on average, you know, eight, nine, 10, $12 a foot. And they grow every five years as a bump, whether it's 7.5%, 5%, or 10%, typically not keeping up with inflation, right? So not really a great real estate investment in and of themselves. However, if you can get to the end of their option terms, there is a lot of upside. And the closer you get and the more nervous these anchors are starting to get, these grocers, and they are starting to get nervous when they see 10 or 15 years of total term left, and they need to stay where they are because you can't just go, there's no land to build another grocery in a Densonville location, and the cost they know is going to be huge. You can really start growing those rents as you get closer to the end. And those are the types of things that we do do, particularly in our value add series of funds. I know we're looking at a deal right now very closely where a grocer is paying about $14 a foot, market is probably closer to 35. They have seven years of total term left, right? And so somehow there's going to be an opportunity for us to add a lot of value in that box. But your typical deal would just say it's a $12 rent on your grocer, it's a $50,000 square foot space. That's about $600,000 a year in net rent. Where you do make your money and where you find a lot of the upside today, and the go forward, you know, kager or NOI growth is in the small shop. And so if you have $50,000 feet of grocer at $12 a foot, it's $600,000 a year. Let's just assume you have another $50,000 feet of small shop and out parcels, and those guys are paying $30 a foot. So that's $1.5 million of NOI. So you have $2.1 million of NOI when you take your grocer and the small shop. And those small shop rents, they're typically five-year leases with five-year options. At least that's what they have been. Today at Sterling, we're very rarely giving options. We're doing five-year leases. Those, but those small shop leases are five-year leases with five-year options in general, and they grow at two and a half, three percent a year historically. Today, you know, our annual growth rates on those are four or five percent. We're not doing two and a half percent bumps, we're not doing three percent bumps because the market is dictating that. The reality is if the average rent is $30 a foot for those spaces, market depend is somewhere probably around $45, $50 a foot. And so we believe over the next 10 years you'll get to a position where all of those small shop rents are what we call naked, right? They don't have any more options, they have no more control, and we can bump those rents from that 30 to 45 or 50. And if you're able to grow those rents on the small shop by that much, and the anchor only grows a little bit, what you do see is across the board you have this, you know, huge cater that we've experienced over the last three years. And I suspect we will for the next seven years, which is why I would say we are three years into a 10-year rental growth super cycle. And at some point you'll pick up your head and there'll be uh a second massive bite at the Apple when you're able to get anchor space back. What's nice about power center space today is those boxes usually don't have 60 years of term. They're more somewhere in the 20, 20 to 30 years of term. And so all those power centers that were built between 2000 and say delivered in 2009, they are coming to the end, assuming those anchors have survived. A lot of them haven't. But those are all rents that are $10, $12 a foot. And you know, we're doing box rents now, well into the 20s, particularly in the markets. We're in, right? You know, we're in the Los Angeles's, the Miamis, the Dallas's, the Bostons, the Seattles, right? We're not in little towns across America. We want to be in places where land has a ton of value. And our belief is real estate investing is about the land, right? Good real estate investing is where you invest in a property where the land appreciates faster than the buildings depreciate. And buildings do depreciate, which is why the government lets you take depreciation. And if you can figure out a place to invest where land appreciates faster and buildings depreciate, that's a good real estate investment. And we believe there's a ton of land under these shopping centers. It's the least efficient use of land in all of real estate. And at the moment, you know, what makes land worth more or less? It's the income that you can derive from that land. And what we do know is all of these shopping centers across the U.S. are deriving a fraction of the rent and income that would be market or that they should be generating if you were able to unlock those leases. They're encumbered by the leases. And I'm a big believer that shopping centers, most of our shopping centers, are probably the lowest and worst use for the land that they sit on.
SPEAKER_01Okay, so first on the inline shop space that you mentioned, your year three of a 10-year rent super cycle. That's fair to say.
SPEAKER_00For sure.
SPEAKER_01And how much ability do these tenants have to absorb these upcoming rent increases?
SPEAKER_00Well, I think a lot, or else they wouldn't be doing it, right? They know what their business is, they know what their sales are. No one's going to agree to pay a rent that would put them out of business. Like that's just not logical. And so why are they able to absorb them? I think there's a couple of reasons. A lot of it's driven by sales, right? Like retailers, their rent is always a function of sales and where they feel healthy in those sales. And so the question is why are they paying low rents? One, and two, like, do the sales justify it? So they're paying low rents because it's supply and demand, and there was more supply of retail space in the suburbs than there was demand. And so there was power, there was pricing power for the tenant. Today, we are undersupplied without a question. And we are at all-time high occupancy rates, and therefore landlords now have pricing power. So pricing power works when you're undersupplied, but it wouldn't work if you have an existing tenant that you want to grow their rent on if they can't afford it. So, how do existing tenants afford it? The reality is in the US, there has as the economy's grown, that helps, right? The populations have grown, that helps. This we can combat inflation, right? There is a direct hedge against inflation in retail, right? Like if you're going and paying a retailer more for something, that is reflected in their rents. Like that is, it's a direct correlation between inflation and our rents for small shop. And beyond that, there has been a transition of sales that has been quite massive in the US into suburban shopping centers, first and second rank suburban shopping centers, which is what we own. And what is the genesis of that transition? And why are we three years into what I believe is a seven-year rental growth super cycle? It's COVID. And so post-COVID, once we got a vaccine, once sort of people got back to what we'll call the new normal, the new normal is different than the old normal. The new normal is people find themselves in the office on average three, three and a half days a week. They're not there five days a week. If your boss says you need to be in five days a week, you figure out how to be there four days a week. If your boss says you need to be there four days a week, people have figured out how to be there three days a week. Their kid has a dentist appointment. Today, if your kid has a dentist appointment at 11 a.m. on a Wednesday, it is acceptable for you to take Wednesday off and work from home. In 2019, that was not the case. And so if you are in the office less downtown in some sort of core, and you're at home two days more, you're spending more money in the suburbs, whether it's buying groceries, going to get a sub sandwich for lunch, getting your coffee locally, meeting a friend for lunch, going to the gym locally, your haircut locally. And so there's been a massive shift in spend on average, two days a week, out of the cities and into the suburbs. One. And that spend shift results in our tenants doing better, more demand for new tenants to be in our space to get that spend. And we can grow rents as a result of that. One. Two, there's also less money being spent on internet sales of certain types in the suburbs. And so groceries, by way of example, there will be less groceries sold online for delivery in the US in 2026 than there were in 2025, and less in 2025 than there were in 2024.
SPEAKER_01Why that?
SPEAKER_00Why is that? Because we have much more time over our schedule. We are more flexible. We have more control. And, you know, it's two o'clock on a Thursday where you are today. And at 2 30, although you're, you know, you could put in your Zoom or an employee of yours could put your Zoom for an hour and a half that you have a Zoom with Brian Kasoy. You don't really have a Zoom with me. You're going to go do your shopping rather than paying someone to do it for. And because you're doing your shopping on a Thursday, maybe it frees up your time on a Saturday to spend with your children, right? So you don't have to go do your grocery shopping on the weekends. That's one reason. More control over your time. If you have more control over your time, you don't need to pay somebody to save you time. One. Two, the cost of delivery has gone up incredibly. So pre-COVID, venture capital was focused on getting you hooked on delivery, free delivery, cheap delivery, you know, much like your Uber, which was way cheaper pre-COVID than post-COVID, it's how do we get you hooked? Once you're hooked, now we start raising the price. The price today of delivery is for a lot of people not worth them, you know, getting off the couch themselves to go get it. And so between the massive sales shift out of the cities into the suburbs, right? The tenants that follow it, and then people being less reliant on delivery, you know, these stores are thriving, their sales are good, and we can push rent. Not to mention the fact that a lot of these stores, particularly the power centers, are being used as distribution hubs, right? If you order something, and I know it's a dirty word in Canada, Target, but if you ordered something from Target in the US, you know, there's a significant majority of chance that that item is being delivered from the Target store close to you, not from a massive distribution center 50 miles away.
SPEAKER_01Interesting. On the power centers for one moment, so you mentioned most of the power centers, you're like they're coming to the end of that initial 20-ish year term lease. So in that, are we are we then just at the onset or year one of a power center supercycle growth?
SPEAKER_00Well, I think it's a little more nuanced than that. I think the issue with the power center business for a long time is you never wanted to get the space back because that $12 rent you were getting from pick the tenant, comp USA, you were going to backfill it at $10 or $12 a foot, and it was going to cost you $60 to $80 a foot to backfill. That's a bad transaction. One, and two, when you did the deal to backfill a comp USA, a lot of these power center tenants wanted, you know, code tenancy rights, exclusive uses, you know, a whole bunch of clauses in their lease, which is why retail is unique and specialized that could devalue if certain things happened, the cash flow stream, right? And not all NOI is created equal, especially not in the power center space, right? So that was where we were. You did lose tenants. And so, say you lost a tenant, like a bed bath and beyond, right? A few years ago. What was different? Bed bath and beyond, all those spaces, because it was more recent, got eaten up really quickly. And the $10 bed bath and beyond rents became $20 or $22 rents. So that was a good trade. And it didn't cost you $60 or $80 a foot. It was 20 or 40 because of the balance of power. And whoever backfilled that space, you didn't need to give them cotenancy clauses and no build zones and you know termination rights and sales kick out. So that's the the power of the pendulum has shifted and the power is now with the landlord. And so these power center rents, when they are quote unquote naked, they have no more options, are going to be all over the board. But as you, as they roll and as you come up to them as the landlord, you're sitting pretty. Your two options are you extend the current tenant a much bigger rent, or you tell them they can leave because you know there's a line of tenants behind them and that it's going to be an accretive activity because the rent's going to be way higher. Their lease is probably going to have less, you know, what we call structural bombs in them, right? Like co-tenancy club, the things that can devalue the rent roll and the cash flow stream. And a perfect example of this is we we have a deal in Phoenix. It's the same deal I mentioned earlier. We had a Michaels. Michaels was paying $12 a foot. And Michaels thought they would get cute by not exercising their last option because they wanted to keep their rent flat at $12 a foot. So they didn't exercise their option. They say, I'll tell you what, we'll stay, we we'll stay flat at $12 a foot and give us another option, $12 a foot. We said no, thank you. You can leave. They said, Well, we don't want to leave. We said, Well, I'll tell you what, we'll give you a five-year lease at your flat rent, $12, but we have a termination right at any time. That's the best they could do. We then went out. We actually knew in advance that we had a grocer who wanted to take their space. We signed a $39 deal with the grocer. Wow. They're $100 in delivery costs, right? But we took a $12 rent, connected to $39, $100 a foot. We actually have a grocery anchored shopping center now, which is a lower cap rate. And so that's the position we're in. Five years ago, seven years ago, if Michaels came to us and said we want to be flat, they probably would have come to us and said we want to reduce our rent from 12 to 10, and we probably would have said, okay, but that's just not where we are today. So I think if you can buy these power centers and you've got seven or eight of these junior boxes, every few years, you know, over the next 20 years, 25 years, you will have a naked box. And that will be an opportunity. So I do think there's over the long run, it's an amazing opportunity to grow red. I think if you're looking to get in and get out in three to five years, hard. But if you're like, hey, I've got a 20-year horizon on this stuff, I think the returns will be incredible.
SPEAKER_01I'm sure you're happy to know you you must just flourish in the fact that retail largely is the new office today and had been for the last few years. Capital is flowing, things are good, leases are getting better. But feedback we hear is it's hard. It's hard to find opportunities now with increased capital demands. Are you finding that today? And like, I'd love to know your perspective on why it is so challenging to get scale in retail, specifically in the stuff you have, which is largely, you know, neighborhood grocery anchored retail and top MSAs in the US.
SPEAKER_00Well, I think it's hard if you're sitting in a Ivory Tower somewhere in New York or San Francisco or Dallas or Chicago or Toronto to do it, because retail is a bottoms-up business. You've got to be on the ground. You've got to be driving corners, which is all I've done for 25 years. We have a team of people who do it. You have to have these long-standing relationships. And a lot of the counterparties are people that survive, like us, whether they're public REITs or private individuals. And those are people we've been in the trenches with for the last 25 years and building these relationships with. And when you do see this wall of capital coming, you have to believe that cap rates will compress further. They've started to compress, but they will further compress because the most direct correlation, the correlated item that you have with cap rates, it is capital flows. Everyone thinks it's interest rates. It's not, it's capital flows. If it was interest rates, office, industrial, multi-retail, they would all trade in a very tight band, but it's not, it's capital flows. If capital wants a product, more capital wants to be in than out, cap rates will compress. If more capital wants to be out than in, they'll expand. In in 2003, 23 cents of every institution dollar it was invested in commercial real estate in the US was invested in retail. Last year, it was about eight. So there was this massive exit of capital. That capital is coming back. It won't be 23%, but it could it be 12%? It's possible. And that capital flowing back to the space is going to compress cap rates. So if you're buying today and you believe cap rates will be compressed further three, five years from now, that also makes you feel a little bit better. And when capital does flow into the space, it's hard for big capital to find where it wants to flow because the average shopping center deal, the average grocery center deal is going to be $40 million. The average power center deal is probably going to be $80 million, levered at 50%. It's not a lot of capital. I'm a big believer, if you had a billion dollars of equity in the US, you could move cap rates easily 25 basis points, which is not a lot of money to be able to do that. And what we see is that there will be capital coming. It needs to find out the right real estate with the right managers, and they're having trouble doing that from all over the world. And so we do get we our phones didn't ring for 15 years. The last two years, they're ringing a lot. And they're ringing from all over the world. They're ringing from up in Canada where you are. They're ringing from Korea. They're ringing from Japan, from Australia. Yesterday we got a call from a large institution in Dublin, right? So the capital is coming. They just need to figure out how to, who to do it yet and what they want to own. And then they do have to get comfortable with the fact that you can't just drop a billion dollars on good real estate in the US quickly. You need to be methodical about what you're doing. And you should be doing somebody who has relationships, operational experience, tenant relationships, which are super different in the US than, I mean, in retail than they are in other categories, which is why you want to have someone who's vertically integrated. You can't put a third party between you as a landlord and your most important client, the tenants. And our tenants are tenants all over the country. It's not like multifamily where you rent someone one apartment in New York. You're not going to rent an apartment in Miami and San Diego and Seattle. We rent, you know, to the exact same tenants all over the country. And those relationships matter. Scale matters. So it is complicated, is complex. You have an advantage if you're up and running and operating and you're in the space and you've been doing it forever 25 years, 30 years. Then if you're sort of decided it's in vogue, I'm going to follow the capital, I'm going to jump back in.
SPEAKER_01One of the most interesting retail stories that I've heard, because you typically do pretty unsexy, stable, grocery anchor retail, is however your rodeo drive deal. Would you mind sharing the details of that?
SPEAKER_00Sure. So I don't love talking about it just because it's not indicative of what we usually do. And the returns aren't, I can't, you know, everyone's like, oh, can you do that again? And I'm not sure that we can. I'd love to think we can, but I don't think that we can. And really, it just goes the opportunistic nature of our platform, right? And so if it's retail and there's an opportunity and we think it's a huge opportunity, we'll do it. So I guess the punchline is I'll start with, because that's sort of what you're focused on, and everyone thinks that it just happened overnight, was we bought a property on Rodeo Drive for 55 million one day and then sold it the following day for 110 million. And so everyone's like, yeah, it's a great deal. But it was a little more complicated than that. So was talking to a friend who happened to be a broker who represented a family who owned a property on Rodeo Drive. And it was their last property on Rodeo Drive. It was owned by a patriarch. The patriarch wasn't healthy and was living off of the income from the one property. The income on the one property was about $1.8 million a year. Um, didn't want to sell the property because of tax issues when he died. He wanted his children to get a stepped-up basis. For whatever reason, the trustee, there was a living trust, didn't want to refinance the property, but he needed cash flow. And I said, Well, you know, if he can't sell and he can't finance but he needs cash flow, they recognized to do a lease on Rodeo Drive, you'd have to spend TI dollars at that time. And you would also, you know, take a year and a half or two years before there was cash flow or rental being generated. And so I suggested that what they needed was someone who would master lease the space, probably below market, so that they would have the opportunity to make a spread and he could get cash flow right away. So we structured a deal where we master leased the space a little bit below market. He started getting rent day one so he could pay to live and pay for his medical bills. And we went out, and the idea was we would sublet it. What we also did was we structured an option to buy the property at $55 million, less a third of the rent we had paid, and the option kicked in six months after the gentleman died or 35 years. He also wanted a put right, and his put right was within 30 days after death, the estate could put the deal to us. And so we did start to pay rent. We did that deal. We paid three months of rent, and unfortunately, the gentleman passed away, and the trustee put the property to us at $55 million, less a few dollars for the rent that we'd paid. Then went, knowing that we had to close the deal in 90 days, LVMH, the global brand, an obvious place to start to try to rent the building or build a new building for them. And so we reached out to LVMH. They said they weren't interested in leasing the building. Could they buy the building? We said sure. They asked for a price and we said 110 million and they said we'll take it. So within 24 hours, their lawyers had, you know, flown to our office and the deal was signed. We had $11 million hard and we closed, you know, soon thereafter, and the day later they bought the deal. So a little more complicated than just buying a deal and selling the next day. Very lucky for sure. Speaks to our team's ability to source off-market transactions and structure things a little more creatively than others may. It was really a problem that we were solving for somebody, and but not indicative of what we do. That is a sexy piece of real estate with a sexy outcome, but nothing we other than that really we do is very sexy. We're focused on value and necessity. The only thing we say that needs to be sexy is sort of the balance sheet and the cash flow statements of the asset. You'll find us, you know, a lot more buying Kroger anchored shopping centers with Chipotle and Dollar Tree.
SPEAKER_01That's amazing. Well, thank you so much for sharing. And one last question, Rio. Um, and we'll not reference in decades, but given how long and how loyal your institutional investors have been to tie to the name of the podcast, the Reop, what do you think makes an investor reop over multiple, uh, I'll just say it, decades?
SPEAKER_00It's interesting. We've talked about this from the get-go, and we had to really understand it because no matter how good you were at retail, your performance wasn't going to look like industrial performance or multifamily performance, right? So I actually think institutional investors are smart. They understand that you can only create so much alpha and that beta drives a lot of the returns. And so for a long period of time, we were in a space that had a lot of negative beta today. What's nice is we expect to be in. We are in a space that's positive beta. And so at the end of the day, returns matter, but relative returns to exactly what you do are the most important thing. And institutional investors are smart and they understand that and they get it. Okay. But returns do matter. More importantly, for us, we've always believed that you know, as long as you're disciplined, you work hard, you earn the trust of your partners through relationships, transparency, honesty, integrity, that those people will come back. Like if they like you, they trust you, they know you're disciplined and are working as hard as you can for them. That if they can catch the beta, positive beta, they'll be back. And even if they just need the access or believe they want sort of to be a contrarian, you're going to give them a little bit of alpha. They'll come back. And so we've always said our reporting has to be with our investors first. It has to be the most transparent, it has to be the clearest. We have to show up and maintain relationships with our LPs. We want our LPs, when they think about who is their best GP, putting returns aside, they want to think of us. You know, how can we be better? And I think with the mindset we have is they're not just our limited partners, they're actually our bosses. Every four years we go to re-up, we're looking at getting rehired by our bosses. And the worst thing that can happen is getting fired. Like who wants to get fired? And so we look at it as we're constantly interviewing every four years for a job. And we know that what we did in the previous four years is where, you know, we are needing to perform for those bosses. And I think if you had an employee that you trusted, you knew worked hard, was totally transparent with you and honest, it's easier to get rehired. And so that's kind of how we we look at it. It served us well through really hard times when a lot of people didn't want retail because it was contrarian. And we're hopeful that going forward, that will continue. But I think look, we're the first to deliver bad news, right? Like we don't our our LPs don't want any surprises. And if they do want surprises, it's gonna be a surprise on the upside. And so it's kind of how we run our business.
SPEAKER_01I love it. Love today's discussion. Thank you so much for the time and all the insights and uh for joining you on the re up.
SPEAKER_00Thank you for having me, Katie.
SPEAKER_01That's another episode of the Re Up. Subscribe wherever you get your podcast. And if there's someone in private markets you think we should be talking to, send us a note. I'm Katie Faskin. Thanks for listening, and we'll see you next episode.
