With more than 25% of all commercial properties in the U.S., retail commercial properties are one of the four main types of commercial investment properties.
Many investors assume that the growth of the internet has rung the death knell for most retailers. But statistics show that not only does the United States have more retail space per capita than other countries, but consumer spending makes up almost 66% of the domestic economy.
Customers shop online, but they still prefer the physical aspect of going into a store and being able to try on and touch things. More than 90% of consumers use their smartphones while in a store, choosing to research products, acquire information, or ask others about intended purchases. This all points to the substantial likelihood that brick and mortar stores will still remain the primary method of purchase in the future.
What Are Retail Commercial Properties?
Retail commercial properties encompass a wide variety of property types. Everything from the Big Box stores like Best Buy and Home Depot down to the local neighborhood shopping center, back up to the huge mega-malls, is a retail income property.
Below are some typical retail properties.
These are malls that have a handful of anchor tenants surrounded by a wide variety of smaller stores. The average size of a regional mall is nearly 600,000 sq.ft., and is usually enclosed with stores facing inwards, joined by a common walkway. A large portion of the space is a parking space, which usually surrounds the outside of the mall.
The regional mall also offers a significant entertainment component, meant to draw families and teenagers during off-hours and vacation periods.
Super regional malls are similar to regional malls. But with an average size of more than 1.2 million square feet, they offer a considerably larger variety of stores and entertainment.
Strip centers are individual stores that form a row and are managed as one entity. With an average size of a little over 13,000 square feet, strip centers are smaller retailer properties which may or may not have an anchor. Stores are locally owned and are usually owner-occupied businesses such as nails salons, hairdressers, dry cleaners, or restaurants.
When an anchor store is present, it may be a convenience store or a larger store such as Home Depot or Walgreen’s. The design of an anchor store is either a straight line, “L” or “U” shape. The stores in a strip center are not enclosed and they may be connected via open canopies or walkways.
Large neighborhood centers
The average size of a large neighborhood center is just under 200,000 square feet. With an average number of tenants ranging from 15-40, while anchor stores offer general merchandise or convenience-oriented products. Typical stores include drug stores, supermarkets, or large specialty discount stores.
With an average size of just under 72,000 square feet, neighborhood centers are purely convenience oriented. With anywhere between 5-20 stores, neighborhood retail centers usually have only one anchor tenant, a supermarket.
A power center features big-box retailers like Staples, Best Buy, or Walmart, power centers average around 430,000 square feet in size and has only a few small tenants.
Out parcels are separate parcels of land within or next to a larger shopping center. Usually, the smaller tenants rent them out.
Lifestyle Retail Center
This center features upscale national chain specialty stores. Includes dining and entertainment outdoors; most average around 333,000 square feet in size. They are meant to appeal to higher-end consumers.
Pros And Cons Of Retail Commercial Properties
Retail tenants prefer to sign up for longer leases in order to ensure they have enough time to establish their businesses. They often require improvements or renovations to a property. Leases have escalation clauses tied to the consumer price index or are in some other way tied to inflation.
At the same time, long leases can sometimes be a problem if rents fall behind present market rates. If that occurs, the long leases mean the owner will have to wait sometime before he or she raise the rent.
Investors should be careful to structure renewal options in order to account for the difference.
Unlike certain types of commercial income properties like single tenant net lease properties, retail commercial properties offer an efficient way to grow multiple streams of income, due to a large number of tenants.
And because there are a wide variety of tenants, net income is less affected when one or two tenants either go under or choose not to renew their lease. This is especially true since tenants are in more than one sector. Even if one sector goes under, you will have a variety of other sectors that will most likely be minimally affected.
The commercial real estate is experiencing high demand right now, especially in the retail commercial properties sector. Most real estate booms last for cycles of around 15 years. That’s why purchasing a retail property now would allow you to get a head start on the cycle for a bigger return on your investment.