A 20% IRR can look impressive. The harder question is whether the deal can actually earn it.
A projected 20% internal rate of return signals significant upside, making a deal worth the risk. At RockStep Capital, we pursue higher-return opportunities when the purchase basis, tenant demand, capital plan, and risk profile support them.
Today’s investors should look beyond percentages and ask what needs to go right to produce them. Sometimes, the answer is reasonable; other times, the model relies too much on future favors.
A 20% retail IRR might be achievable, but investors should evaluate the assumptions. A lower return, backed by current income, positive leverage, a sound basis, and manageable risk, could provide a better risk-adjusted opportunity.
That distinction matters in HomeTown retail markets, where overlooked shopping centers can provide meaningful income without elaborate redevelopment.
Imagine two retail investments with the same total return: one pays out more cash early on, while the other earns most profit when sold in year five. The first typically shows a higher IRR because investors get their capital sooner.
A projected 20% IRR might depend on:
IRR lets investors compare return profiles, but its reliability depends on the quality of the assumptions, since it is still a model output.
Many successful value-add real estate investments thrived in markets with lower borrowing costs, rising property values, and aggressive buyers.
Falling cap rates sometimes increased values even with modest income changes.
Today’s environment demands tighter underwriting. Financing and construction budgets need careful management, and investors are less confident that future buyers will pay more.
As market tailwinds become less reliable, more returns must come from ownership efforts like buying at good prices, leasing well, controlling capital costs, improving operations, keeping productive tenants, and managing debt responsibly.
Favorable market conditions are like a moving walkway at an airport: they support investments and require less effort. When it slows, the operator must work harder, raising the bar for returns and highlighting what the sponsor can control.
When investors see a projected 20% IRR, the better question is: What must happen for this investment to earn 20%, and how much evidence supports those assumptions?
Consider two shopping centers: Shopping Center A is mostly occupied, reliable NOI, some below-market leases, and minor upgrades. Shopping Center B is half vacant, needs major construction, a new anchor, and expects a sharp NOI increase before sale.
Both models may show a 20% IRR, but their paths differ. One relies more on existing income, the other on future execution.
For a new investor, a few questions can expose that difference quickly:
These questions turn a return target into a testable investment thesis and help investors distinguish a strong opportunity from a seemingly better deal.
Retail investors should distinguish between encouraging market signals and assumptions robust enough for financial modeling.
When a broker says retailers “love the market,” or a national tenant visits a vacant space, these subtle signals can help pinpoint demand. But these aren’t very helpful for accurate financial modeling.
Actual underwriting requires stronger evidence because the financial model has to rely on more than enthusiasm.
Experienced HomeTown retail developers use local expertise to identify expanding retailers, traffic shifts, and overlooked properties. This knowledge reveals opportunities, while disciplined underwriting assesses potential returns. Together, they are powerful; used interchangeably, they can create false confidence.
Retail value creation can be rewarding, but leasing and redevelopment rarely unfold exactly on schedule.
A shopping center includes a grocery store, discount retailer, restaurant, salon, dental office, fitness operator, and local businesses. Each tenant has different lease terms, construction needs, opening schedules, and renewal options, so the business plan depends on coordinating these elements.
Retail leasing happens sequentially. A new anchor can encourage leasing nearby small shops, but delayed anchor openings may hinder smaller tenants. Permits can be delayed, and construction scopes may change during work.
RockStep Capital only takes on execution risk when the basis and reward make sense, but the model should reflect the plan's complexity instead of oversimplifying it.
A lower projected return warrants attention if it depends on fewer aggressive assumptions.
Consider a HomeTown retail investment targeting 11% to 13% IRR. The property has strong occupancy, cash flow, leasing activity supporting retailers, a manageable capital plan, and financing that supports the property.
That profile may look less exciting than a 20% value-add deal, but it could offer a stronger risk-adjusted return, meaning the expected reward is weighed against the risk required to earn it.
An 8% projected return on a high-priced property seems safe but leaves little margin for error. A 20% value-add return needs major lease-up, aggressive rent growth, costly construction, and a strong future sale.
A 12% HomeTown retail investment can be initiated with existing income and modest improvements. It isn't necessarily better, but it offers a clearer path to the projected outcome. Investors should compare how returns are generated rather than ranking percentages alone.
Positive leverage occurs when a property’s yield exceeds its borrowing cost. An 8% yield on a shopping center with a 6.5% borrowing cost exceeds the debt cost, supporting investor returns.
If the property yields 5% and debt costs 6.5%, the investment faces a headwind. The owner needs income growth, lower borrowing costs, appreciation, or a mix to improve economics.
For retail investors, positive leverage can make a business plan less reliant on future appreciation because more of the return comes from current cash flow.
Positive leverage can't save a weak property overwhelmed by poor tenants, vacancies, deferred maintenance, weak demographics, or a high purchase price.
A well-located HomeTown retail center with durable cash flow and sensible financing benefits investors, as debt supports the business plan without adding problems.
Projected IRR is often the first metric shown in a commercial real estate listing, tempting investors to treat it as a simple scorecard. However, retail underwriting requires additional context, as factors such as tenant demand, lease terms, traffic levels, competition, construction costs, and property management all influence the final outcome.
Smaller U.S. markets complicate pricing due to fewer institutional buyers and less data, requiring operators to deeply understand the property and market.
A shopping center with limited competition, strong local traffic, productive tenants, and an attractive basis can be a compelling investment even if its projected IRR is modest compared to heavily engineered value-add deals.
At the same time, a property can look cheap for good reason. Weak tenant demand, deferred capital needs, poor access, or an unfavorable competitive position may explain the discount.
The underwriting has to separate genuine opportunity from a price that only appears attractive.
Investors do not need to avoid 20% IRR opportunities. They should ask for stronger evidence when more things must go right.
A high-return business plan becomes easier to believe when the sponsor can clearly explain:
A base case shows potential outcomes if the plan succeeds, while a downside case reflects the investment's tolerance for imperfection. Considering both helps investors assess if the expected return can withstand setbacks.
One of the simplest ways to evaluate a high projected return is to change a few assumptions and see how the economics respond.
New investors do not need to rebuild the sponsor’s entire model. Testing a handful of practical scenarios can reveal how fragile or resilient the projected return is:
A basis point equals one-hundredth of one percentage point, so 100 basis points equals 1%. In commercial real estate, that kind of cap-rate change can materially affect property value.
If a 20% IRR drops after an ordinary setback, the model indicates how sensitive the return is to the base case.
If the investment performs acceptably in downside scenarios, the return is more trustworthy since the deal shows resilience to imperfect execution.
Family offices may focus more on durability due to their multi-cycle investment horizon.
Preserving purchasing power, generating income, controlling downside risk, and compounding capital may matter more than the highest projected IRR in offering memorandums.
Some investors find an 11% to 13% HomeTown retail opportunity more appealing than a complicated 20% deal due to visible income and a manageable plan. Others may justify the higher figure, so underwriting should decide.
A 20% IRR can be real, but it can also be fragile. The difference usually comes down to how much of the return is supported today versus how much depends on future execution.
At RockStep Capital, we would rather own a deal with a clear, defensible path than chase the highest number in the model. Sometimes that path leads to 20%, and sometimes to 12%.
The percentage gets attention. The path earns the return.