Buying a shopping center or multi-tenant retail investment property involves a multitude of moving parts. For investors, this means shifting focus from one component to another throughout the process.
Read on to learn more about which factors you should prioritize when purchasing a commercial investment property with more than one retail tenant.
Location, Location, Location… And Traffic Count
It may sound cliche, but the old adage holds true: commercial real estate success often hinges on location. When evaluating a potential property for purchase, consider location first. Start with the basics — is the neighborhood safe? Is it convenient? How’s the foot traffic? How’s the automobile traffic? How’s the ingress and egress? Is parking adequate?
Take a look at the demographics of the surrounding neighborhood. Your local Chamber of Commerce, library, city hall, or census bureau are all good places to start. Factors such as number of households and estimated age, race and income levels of the population around the shopping center or multi-tenant retail property will paint a picture of your customer base… do the demographics of your potential new neighborhood match up with those of your target audience?
You’ll also want to consider traffic count, or the number of cars that pass by on the roadways at varying times of day. Your local city, county or state traffic department may provide this information.
As a general rule, aim for street traffic of at least 50,000 cars per day. While auto traffic counts are generally king, in some cases business owners may also keep track of foot traffic counts, another important metric. It doesn’t hurt to visit tenants and ask! Keep factors like congestion and rush hours in mind, as well.
Age Matters: How Old Is The Property?
Over time, any property needs maintenance, and an older property will generally present more maintenance and repair issues. While maintenance and repair are simply givens with any property purchase, be sure you’re aware and prepared for the costs that (inevitably) come up. Issues such as galvanized pipes, concrete repair, water heaters, HVAC systems and other issues should be taken into account with any potential property investment.
For instance, consider a roof repair. While this might seem like a simple maintenance issue on the surface, imagine that you’ve purchased an older building and a leak appears. When you hire a repair team to fix that leak, they find asbestos. Now your simple repair job has turned into a complex — and costly — issue. If you’re buying an older building, be prepared to take on the associated costs and expenses.
Diversity + Quality = Desirable Tenants
As many experts have noted, a quality, diverse tenancy provides value. When you’re considering buying an investment property, take a close look at the existing tenants. Ideally, you’ll want to find a property with a diverse mix of retail tenants and a balance between anchor stores, local businesses and national chain stores. Local businesses will help your property serve as a part of the community, strengthening local ties, while national chains add quality and reliability while minimizing risk.
The goal? Creating a diverse mix that allows customers to get all their shopping needs met in one place, making your property a destination.
You’ll also need to evaluate tenant quality. To start, take a look at rent rolls, credit files and payment records of existing tenants. Supplement your research by speaking one-on-one with tenants.
When Do Tenants’ Leases Expire?
In a perfect world, you’ll be able to determine when existing tenants’ leases expire through clear commencement and expiration dates. In the real world, however, it’s not always so simple. For example, tenants may have floating commencement dates that depend upon some repair or improvements completion. In order to determine an accurate schedule of lease expiration dates, you’ll want to carefully review contracts, lease terms and any relevant sections that may impact commencement, such as a work letter that details work that must be performed before a lease commences.
Reviewing all lease documents is an important part of due diligence. Pay attention to lease lengths, as well. Are most leases month-to-month or long-term? Month-to-month agreements may indicate high turnover and less stability. When reviewing tenant leases, you’ll want to determine any and all:
- title policies
- insurance policies
- certificates of occupancy
- ADA compliance records
- maintenance contracts
- tax histories
- parking lot contracts
Review the Income/Cap Rate
When comparing different properties for potential purchase, cap rate can be a handy assessment tool. To find the capitalization or cap rate, divide the net operating income (NOI) and the sale price — or current value — of the investment property. This will help you determine the potential return on income (ROI). For instance, say an investor purchases a shopping center with an NOI of $100,000 for the sales price of $1 million. In this case, the cap rate would be 10 percent. A higher cap rate indicates higher potential for income.
Evaluate The Competition And Surrounding Properties
Finally, take a look at the surrounding properties, as well as other, similar shopping or retail centers that would be your competition. Both neighboring properties and the competitors can harm or help your opportunities. For instance, a high-end shopping center might not thrive in an area that’s home to dollar stores and discount marts, but may fit right in around spas, salons or boutiques.
Consider competitors within the surrounding area. Does the investment property fill an unfilled niche, or is the market saturated? Does the property offer unique tenants, such as local businesses, or is it more of the same?
TL;DR: What to Look for When Buying a Shopping Center or Multi Tenant Retail Investment Property
To summarize, purchasing a multi-tenant retail property or shopping center involves numerous moving parts, but these are the key factors to focus on:
- Location & Traffic Count
- Property Age
- Tenant Mix – Diversity and Quality
- Lease Expiration Schedule
- Income/Cap Rate
- Competitors and Surrounding Properties
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