Investing in Retail Spaces: Strategies and Tips for Retail Property Investments

February 9th, 2024

Investing in retail real estate can provide stable returns through rental income and long-term capital appreciation. Retail properties like shopping malls, outlets, and standalone stores continue facing steady demand given consumer spending needs. By leveraging the right retail investment strategies, investors can enjoy favorable risk-adjusted profits from this sector.

Overview of Lucrative Retail Property Investments

Retail real estate delivers relatively consistent returns by catering to the sector’s durable demand drivers. Household consumption sustains steady needs for retail space outside of recessions. And prime retail properties tend to maintain high occupancy rates, especially grocery-anchored shopping centers which provide essential goods.

With proper due diligence and active management, retail investments offer these rewarding financial upside factors:

  • Rental Income Generation: Long-term leases with tenants deliver monthly income
  • Appreciation: Property values and rental rates tend to increase over time
  • Controlled Risk: Retail acts as a hedge against inflation given rents can be raised
  • Tax Incentives: Cost segregation and 1031 exchanges lower tax burdens

Key Retail Sector Demand Drivers

Several macroeconomic factors sustain ongoing demand for physical retail properties despite e-commerce capturing more sales:

  • Household Spending: Consumer expenditures account for over two-thirds of U.S. GDP. Retail properties enable fulfilling these needs.
  • Food/Beverage Sales: Grocery, pharmacy, liquor, and restaurant purchases predominantly occur in-person.
  • Experience-Based Activities: Stores offering personalized services, entertainment, curated product assortments entice visits.
  • Impulse Purchases: Tactile shopping encourages unplanned buys outweighing digital browsing.
  • Immediate Product Needs: When requiring goods instantly rather than waiting days for delivery, consumers turn to physical retailers.

In particular, grocery-anchored retail properties maintain steady foot traffic as consumers consistently buy food and everyday essentials in-person. Developers incorporate more dining and services into retail projects to ensure vibrant community hubs.

Savvy investors in retail real estate track shifts in consumer behaviors and preferences to adapt properties catering to emerging needs.

Evaluating the Best Retail Asset Classes

Investors can target various retail property types, ranging from malls to standalone stores:

Shopping Malls

Regional malls with strong anchors like department stores and grocery chains reach the broadest customer base. Top-tier malls in dense metro areas see excellent foot traffic and sales. Class A malls tend to maintain 95%+ occupancy rates through economic cycles.

Prime Locations: Malls situated in affluent communities with population growth and barriers to future competitive development offer resilient positioning.

Ideal Tenant Mix: Anchors like successful mega-groceries exceeding 50,000+ square feet attract reliable traffic. Growing categories like off-price apparel, fitness centers, fast casual eateries make solid co-tenants.

Facility Condition: Properties requiring minimal near-term capital investment provide the best cash flow upside. Necessary renovations and upgrades should align with tenant demand.

Lifestyle Centers

Open-air lifestyle centers blending upscale fashion boutiques, restaurants, entertainment venues, and green space encourage shoppers to linger. Lifestyle centers averaged $541 sales per square foot in 2019.

High-Income Areas: Lifestyle centers located amid major metro suburbs with average incomes exceeding $100,000+ sustain luxury retailer demand

LEED Certification: Developments earning LEED green building certification command premium rent levels from consumers supporting sustainability.

Exceptional Design: Creating upscale ambiance through elements like landscaping, water features and designer lighting attracts affluent shoppers

Power Centers

Power centers feature large anchor stores like big-box retailers, pet stores and office supply chains. They depend less on impulse shopping. Lower maintenance costs offer profitability.

Ideal Economic Conditions: Middle class areas with sustained job growth fuel demand for discounted goods at power centers

Evolving Anchor Tenant Base: Investors must monitor membership warehouse, off-price chains rapidly expanding/contracting and replace vacant big box stores with urgent care clinics, churches

Prime Parking Ratios: Power centers require ample surface parking given bulkier purchases. Target at least 5 spaces per 1,000 square feet of retail space.

Outlet Malls

Outlet malls contain manufacturers’ branded stores selling discounted or outlet-specific merchandise. Outlet malls averaged $522 sales per square foot in 2019. Focused on value, they tend to stay resilient during slower economies.

Strategic Geographical Locations: Building outlet malls within 350 miles of major metros and along busy highway intersections encourages weekend tourism traffic

Sufficient Critical Mass: Maintaining over 400,000+ square feet featuring at least 100+ outlet shops satisfies consumer expectations for abundant selection and bargains

Ongoing Brand Reinvention: Adding fresh fashion labels and emerging direct-to-consumer boutique brands to replace declining retailers keeps properties relevant

Standalone Retail

Freestanding or standalone retail properties like restaurants, grocery stores, pharmacies, convenience stores, boutiques, salons etc. offer neighborhood convenience. Essential retail tends to face steady demand through business cycles.

Ideal Visibility: Pick highly visible corner plots on main suburban thoroughfares benefiting from ample daily vehicle traffic and branding exposure

Sustainable Tenants: Focus on service-based retailers less vulnerable to economic cycles like hair/nail salons, urgent care clinics, pet stores

Diversified Leasing: Unless housing a grocery store or pharmacy chain as the primary tenant, lease space across at least 4-5 tenants to mitigate risk

Market Keyword Optimization: Ensure online directories and mapping services showcase accurate information so nearby residents easily discover offerings

Table summarizing retail property types:

Retail Property Type Key Attributes Risk Factors Typical Occupancy Rates
Regional Malls Major anchors, wide mix of stores, dining and entertainment options Dependent on anchor stores, costly maintenance 95%+
Lifestyle Centers Upscale boutiques, restaurants, some entertainment, outdoors pedestrian orientation High-income demographics dependency, weather issues 90%-95%
Power Centers Large anchors like big-box stores, discounted goods Rapidly changing anchor store dynamics 90%-96%
Outlet Malls Branded goods manufacturers’ outlet stores, discounted merchandise Customer traffic contingent on value offerings 97%+
Standalone Restaurants, groceries, pharmacies, other neighborhood convenience retail Smaller scale limits upside. Local economy reliant. 85%-95%

Conducting Due Diligence on Retail Assets Before Acquiring

Conducting comprehensive due diligence is crucial for assessing a specific retail property’s investment prospects before acquiring it:

Verify Finances and Expenses

  • Request 5-year financials covering profits, operating expenses, maintenance costs and capital expenditures.
  • Carefully analyze rent rolls with full lease details on term durations, sales history, renewal options. Review for red flags like significant rent reductions.
  • Validate budget expectations for insurance, staff payroll, sales/property taxes against actual costs. Review if any tax appeals successfully reduced expenses.

Confirm Building Condition

  • Inspect facilities in person, checking construction quality, layout functionality, interior and exterior maintenance needs
  • Assess plans/capability to renovate, expand or repurpose structures to satisfy changing tenant requirements
  • Review brand impact of owning aging outdated buildings diminishing portfolio prestige

Research Location Thoroughly

  • Verify population, housing supply growth via planning agency forecasts for area surrounding property
  • Conduct competitor analysis assessing all existing and planned retail space nearby
  • Check for zoning risks from local government limiting allowable property uses

Verify Environmental Status

  • Review Phase 1 assessments ensuring no past land contamination
  • Confirm compliance status of waste management plans and disposal processes

Review Cap Rate Spreads, Cash Flows, ROI Feasibility

  • Stress test investment payback across varied economic conditions with higher vacancy and lower rents
  • Assess strategy for executing value-add business plans

Following due diligence prevents unwelcome surprises post-investment. This process mitigates overpaying for assets or relying on misguided optimism to achieve returns.

Maximizing Value of Retail Investments Through Active Management

By implementing dynamic management strategies, retail investors can unlock a property’s full potential:

Cultivating Win-Win Tenant Relationships

  • Structure long-term leases with options for periodic contractual rent escalations to provide income and cash flow growth
  • Reward loyal tenants wanting to renew leases with generous tenant improvement allowances and build-outs
  • Promote tenant success with marketing assistance and facility upgrades like revamped entrances, children’s play spaces driving additional customer visits and sales

Reducing Operating Expenses

  • Lower utility bills substantially through upgraded HVAC systems, building automation controls and widespread LED lighting retrofits
  • Renegotiate waste disposal contracts implementing effective recycling programs and exploring renewable options like food waste composting
  • Verify tax assessment accuracy and protest inflated property taxes by providing comparable assessments data

Increasing Asset Life and Functionality

  • Modernize aging properties via facade makeovers, layout reconfigurations and technology upgrades meeting contemporary retail standards
  • Convert declining retail into vibrant mixed-use space by incorporating modern offices, residential buildings and community services
  • Enhance parking efficiency via automated space counting systems, premium reserved stalls for quick commerce purchases and EV charging stations

Monitoring Market and Consumer Shifts

  • Track retail bankruptcies, store closures for early retenanting opportunities from displaced chains
  • Analyze shopper survey feedback to tailor property offerings closer to latest consumer preferences
  • Forecast impacts on property from accelerating e-commerce adoption, economic shifts, technology disruptions in retail sector

Adding Value Through Strategic Expansions

  • Expand by acquiring adjacent land/buildings to attract new junior anchors when positioned for growth
  • Densify parking lots with new pads for emerging quick service restaurants and medical clinics
  • Redevelop declining areas into urgent indoor self-storage facilities or climate-controlled warehouses as online order distribution hubs

Prudent investors combine patience in holding prime retail assets long-term with an agile management approach. Adapting retail properties to ever-changing consumer demand and business conditions sustains profitable performance across economic cycles.

Tips for Exiting Retail Property Investments

Investors seeking to cash out equity can utilize various exit strategies:

Sell to Another Investor: Maximize returns by listing property to take advantage of retail capitalization rate compression

Launch an IPO: Pool assets into a publicly traded REIT allowing everyday investors to gain exposure

1031 Tax Deferred Exchange: Mitigate capital gains tax liability from property sale proceeds by placing funds into another investment

Cost Segregation Study: Accelerate tax deductions by retrospectively categorizing components based on actual life spans

Conclusion on Rewarding Retail Property Investments

The future remains promising for savvy investors pursuing retail asset classes aligned with durable consumer spending needs in suitable metropolitan regions. Retail properties deliver stable dividend-like cash flows. And enhancing functionality via skillful management and strategic expansions can amplify properties’ positioning and value. By leveraging the right due diligence processes and sustainable operating tactics, retail real estate investments satisfy portfolio objectives for balanced returns across economic cycles.

Empire 8 Property invites you if you are seeking personalized guidance identifying lucrative retail assets matching your investment goals. Our dedicated team of specialists offers customized solutions assisting with every phase of the acquisition and management process – from due diligence checklists facilitating initial opportunity assessments to exit strategies maximizing returns. Empire 8 Property stands behind the commitment of delivering elite service and client education. We want to see you succeed, which is why Empire 8 Property focuses on cultivating long-term investor relationships grounded in integrity, expertise and results. Contact us today to begin your venture into retail property investment succes!

BOOK

YOUR STRATEGY SESSION BELOW

    Categories

    Copyright © 2021 empire8property