If you’re an investor that deals with retail, you’ve probably heard plenty about the downfall of strip malls.
The truth is, like any asset class in commercial real estate, the story differs depending on the market you’re in. In some cities, vast swaths of retail space sit empty and abandoned, while in others they are being torn down or renovated as mixed-use properties. There will always be properties within the same asset class that do not do well, while others flourish.
Even when anchor tenants in a strip mall go out of business, seemingly destined to take the rest of the tenants with them, some retail centers bounced back as those anchor stores were turned into industrial or office space, or simply replaced with other high-quality tenants.
The key to finding a good retail center
The key factor as always is location. An area with high medium income, good schools, and low unemployment will do well when the property is repositioned as commercial property, while one in a high crime low-income neighborhood will never make it to the drawing board.
Urban-suburban markets with a population of 50,000 or more and strong economic development fit in the former category very well.
The cities and counties in these areas can provide the financing and the support to revitalize these areas and ensure that they don’t die. If cash flow is positive when occupancy is above 75% then the property has a good chance of doing well.
Seek out an expert’s advice
As in any field, you need to either be an expert or be willing to find one who knows the market you’re interested in so that you can properly evaluate the risk factors and determine the profitability of a property. This is especially true if you are new to the field of retail – even if you’re experienced investors in other CRE investment areas.
An expert can make the difference between a successful cash-flowing property and one where the investor has lost both equity and the purchase price by overpaying for a property in a poor location with a mediocre tenant mix.
Grocery-Anchored Shopping Centers
Retail malls anchored by a neighborhood shopping center have been doing particularly well lately. There are several reasons why these centers do well when those anchored by big box stores do not.
- Neighborhood shopping centers do well because they are close by and easy to get to. They offer residents an opportunity to take care of several errands at once, saving them time and money and making the trip relatively painless.
- Grocery-anchored shopping centers often serve as a meeting place for community members while providing them with a convenient place to take care of their day to day needs. By offering everything from dry cleaning to health services, busy residents cannot only get multiple errands done at once, but they can also interact with others face-to-face in an increasingly online-only world.
- Grocery-anchored shopping centers are quick to adapt to the changing needs of their customers. Recently retail stores have begun evaluating the data, which shows that while people like shopping online, 80% hate the online return process.
The hassle of talking to customer service who are often located out of the country, items that were sent by customers but subsequently “lost,” wait times for problem resolution, returns being rejected because of a technicality… all of these provide tremendous opportunity for the investor that sees them before the rest of the crowd.
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