There are dozens of metrics involved when analyzing retail properties, and with the pressure on brick and mortar retail properties to hold their own against e-commerce companies, competition can be fierce.
If you’re interested in making sure the retail property you’re considering has a chance of standing out from the crowd, then it’s essential you avoid choosing market indicators that don’t predict success.
Here are some common mistakes investors make when analyzing retail properties:
Choosing Properties That Don’t Match Your Investment Goals
It’s critical that you choose investment properties not because you love the idea of owning a “famous” brand, but because it fits with your short and long-term investment goals.
Of course, you should also take into account the composition of your investment portfolio, as well.
Retail properties – like any commercial property – range from high to low risk, with mom and pop strip malls in suburban or rural areas on the high-risk end, and triple net national brand properties on the other end.
Which property you choose depends on your risk tolerance level.
For example, are you interested in higher returns, despite the innately higher risk involved? Then you might be willing to take on the risk of a mom-and-pop retail store, or a strip mall.
On the other hand, if you’re saving for retirement, a national brand net lease property is your best bet, since the steady stream of passive income is low-risk and quite stable.
Of course, it doesn’t have to be one or the other; you could have a mix of both in your portfolio. But before you make any decisions, you need to be clear about how much profit you need to make.
Not Examining The Details Of The Lease Carefully
Don’t assume anything about a lease.
Every lease is different, and even if the owner claims it’s a net lease all it takes is for one clause to mess things up for good.
Take the time to review the lease of each and every tenant. This is critical if you want to minimize your risk exposure and ensure the stability of your cash flow stream.
Check to see if tenant leases are staggered; you don’t want all the tenant leases to come due at the same time, plus you need to be sure that if there is an unexpected vacancy or two, that you’ll still be able to cover your debt service and any other operating expenses.
Lenders will anyway be evaluating the property to determine how well the property will perform in the event things go wrong. They’ll want to make sure you have enough reserves on hand in order to cover any unanticipated events.
Including The Wrong Mix Of Tenants
While it may seem like all retail businesses are pretty much the same, statistics show that including the wrong type of tenant in a retail center or strip mall can be deadly.
Experience shows that while many types of retail stores are taking a beating from e-commerce, other types are doing even better than they were before.
These types of tenants – called destination tenants – offer services that can’t be replicated online, and as such, attract plenty of customers.
Quick service restaurants are one example of a sector doing exceptionally well, as are a mom and pop stores such as nail and hair salons, medical offices, karate schools, dry cleaners, and other service-based businesses.
Avoid furniture and clothing stores: 90% of retail stores going out of business fall into one of these categories. Both are easily bought online, and both are susceptible to price wars, which online stores inevitably win due to fewer expenses.
In the same vein, you should also make sure one tenant doesn’t take up more than 50% of your space. If they do take up that much space, they should be an investment grade, national tenant with a long lease, preferably a net.
Adding Rent Increases
Adding in a mandatory rent increase every few years may seem like good business, but in reality, it may only drive tenants away.
While there are some tenants that stay in one location seemingly forever, only net lease tenants stay for the long-term – 10 to 15 years on average, sometimes more.
Other tenants may never stay long enough to for the increases to apply, but they will be wary of one and will either avoid signing a lease with rent increases or will be looking for an out as soon as they get the chance.
Sticking To The Same Old Strategy
Retail properties are intensely competitive, and if you plan on surviving, you can’t keep sticking to the same old tired strategy.
The retail stores and centers that are making a decent profit are those that keep a close eye on market trends, constantly adjusting their marketing strategies in order to take advantage of the shifting tides.
Not only will vacancy factors and retail rentals change during the year, buying patterns of local customers can change rapidly from week to week.
If you want to beat your competition, it’s essential you not only stay on top of retail shopping patterns and regional economic indicators but that you have a specific plan in place for implementing changes in reaction to new information.
Owning and managing a retail property isn’t for the faint of heart unless it’s a net lease property. Still, with the right strategy, it is completely possible to make good cash returns, despite the risk.