What to Know About Investing in Retail Real Estate

Sometimes, news reports about the retail sector can feel pretty doom and gloom: “the retail market as we know it is over,” “retail is dead,” etc.

But as we all know, you shouldn’t buy into every headline you read.  Retail plays a huge role in the global economy, and retail real estate is a large market that is a lucrative arena for savvy investors.  

With the onset of COVID-19, the retail market has certainly experienced shifts—the largest one being the uptick in online shopping. However, e-commerce still only accounts for 13 percent of total retail sales.

That means people are still utilizing brick-and-mortar storefronts; it also means that opportunities still abound for successful retail real estate investments. There’s no doubt about that. The real question is—how do you find the opportunities that are a right fit?

What is Retail Real Estate?

Retail encompasses a wide variety of real estate ranging from mixed-use buildings in densely populated downtown areas to strip malls and single-tenant facilities in every area of the country.  These retail spaces could be filled with any number of businesses, including restaurants, grocery stores, entertainment venues, convenience stores, travel agencies, sporting goods stores, big-box franchises, etc.

What Drives Success?

The most critical feature that determines a retail real estate investment’s success is often, as the old adage goes, “location, location, location.” A secondary marker of success is the product being sold. For example, a thriving restaurant chain next to an IMAX Theatre will see more foot traffic than, say, a standalone store that sells only vintage comic books.

Consumer traffic drives purchases, which is why grocery-anchored centers generally perform very well.  They have a captive audience of repeat customers coming and going, often on a weekly basis.  

Which Sub-sectors of Retail Real Estate are Performing Best/Worst?

Many of us remember spending our childhood shopping at the mall.  More nostalgic than anything, those sprawling centers now play a much smaller role in the retail experience.  Across the nation, many suburban malls are closing or being repurposed into different, more varied uses—including flex space for offices and even multifamily apartments

Analysts expect a third of traditional malls to close by 2030, and COVID has likely hurried those estimates along even quicker. However, it is important to remember that this is only one segment of retail real estate.  People are now far more likely to visit an open-air retail center than a traditional mall when looking for an all-inclusive experience (dinner and a movie, massages, theatre, concerts, etc.). 

 Why Does it Still Make Sense to Invest in Retail Space?

At the end of the day, we have to look at the numbers—and 87% of shopping still happens in the store.  Where do you go when you run your weekly errands?  Grocery stores or big-box retailers.  Where do you make larger purchases like tech or automobiles?  Many prefer to make those in-person, so they visit those brick-and-mortar retailers. Do you order takeout through delivery apps?  That food comes from a retail restaurant location.

Most storefront locations are owned by someone other than the person or business that is occupying the space.  Therefore, the investors make their money from owning retail real estate in desirable locations without getting into the retail business itself.  In addition, many retail real estate leases are “triple-net,” which means the tenant pays for maintenance, property taxes, and utilities, greatly increasing the landlord’s (i.e., the investor’s) net operating income.

The retail sector also benefits from longer-term leases, often in the 5-to-10-year (or more) time frame for tenants with nationally recognized brands. These longer-term partnerships produce predictable income for the owners and reduce the additional expenses and opportunity costs related to securing a new tenant or building out a location to fit their needs.

So, is the retail apocalypse upon us?  No—and we think that it’s safe to say investors should be *cautiously* optimistic about opportunities in the retail real estate sector.  

As retailers adjust to the changing consumer demands and habits, expect creative repurposing of retail space, which will lead to a more varied shopping and entertainment experience.  The use of space may need to change as well— for example, smaller boutique stores may need to function like showrooms and offer more online inventory.

The most challenging part of adapting to the changes in the retail real estate industry is tapping into what consumers want and matching it with the right supply.  When working with an investment firm that specializes in performing due diligence and securing retail real estate, you can find locations that will pay off—ones that are well-trafficked, have strong anchor tenants, and attract a steady stream of consumer attention.

Ready to invest and wondering what opportunities might be available to you? We are here to help you land investment opportunities across a variety of sectors to find one that fits your strategy, preferences, and risk level.

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