How to Invest in Retail Real Estate

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Despite this public perception that e-commerce is putting brick-and-mortar stores out of business, the commercial real estate sector and retail in particular has a long track record of delivering solid returns. Plenty of attractive options are out there for investors.

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The United States retail market accounts for more than 20% of global retail sales—the largest in the world. Similarly, according to JLL, the U.S. is also one of the top countries for the amount of real estate space per capita. You might be thinking–Isn’t e-commerce putting brick-and-mortar stores out of business? Despite this public perception, the commercial real estate sector has a track record of delivering solid returns. Retail real estate has historically commanded the highest price per square foot of any commercial real estate.

According to data from the National Council of Real Estate Investment, on average, retail real estate has produced average annual returns of 10.8% over the past 20 years—just slightly ahead of the 10.2% average produced by all commercial property types, which includes office, industrial, retail, and apartments.

 

Types of Retail Real Estate—An Asset Class Overview

Retail properties are created for the sole purpose of selling consumer goods and services. These properties vary in value depending on their location, age, quality of construction, and tenant base—though every retail property is designed to sell something, products can impact your return. If you are interested in learning more about shopping malls, we have a guide. For other types of retail spaces, see below.

 

Lifestyle Centers—This can be a shopping center or mixed-use commercial development. It may combine traditional retail functions, such as stores, with additional amenities for upscale consumers, such as spa services and fine dining. In fact, lifestyle centers are often characterized by restaurants that are of high enough quality to attract customers on the merits of dining alone—not just by convenience.

 

Factory Outlets—Often incorrectly labeled as malls, factory outlets are generally not enclosed and house outlet stores. Food options are often limited and of a lower quality.

 

Power Centers—This type of retail real estate is a cluster of big-box stores. This may include anything from discount stores and home-improvement retailers to large specialty chains; think Walmart, The Home Depot, Lowe’s, Sam’s Club, and Dick’s Sporting Goods. Fast-food chains are often found on these sites.

 

Community Centers—More colloquially known as a “strip mall,” a community center will often have a grocery store and a discounter, as well as convenience retailers like drugstores and liquor stores.

 

Convenience Centers—These small properties are often less than 30,000 square feet. They are generally occupied by smaller, convenience-based retailers, such as dry cleaners, drug stores, and nail salons.

 

The True Effect of E-Commerce

E-Commerce, Amazon services, in particular, continues to dominate most conversations about retail. Most view it as a major threat to any form of retail real estate investment. However, though E-Commerce continues to see solid annual gains as a percentage of total retail sales, it has only just breached the 15% mark. E-Commerce will not destroy brick-and-mortar retail, but it will continue to change its use. Retailers are beginning to get creative with their spaces, increasingly using stores as showrooms as a means of driving online sales. Some venues offer in-store pick-up, and some continue to rely on the importance of touching and assessing merchandise in person for larger purchases.

 

What to Look For and Adding Value

Consumer spending drives all retail real estate. In the United States, the consumer accounts for about 70% of the GDP. As a result, the retail sector is nearly always successful; the unemployment rate is low and consumer confidence is high. However, there are several micro drivers of consumer spending. Below, we have isolated a few of the most important factors to consider when investing in commercial retail property.

 

Traffic—Traffic drives retail stores, whether its pedestrian foot traffic or vehicle traffic. Tenants and property owners should be aware of the amount of traffic in front of their property. The more traffic, the more valuable the property.

 

Demographics—Retailers rely on locations with concentrations of their target customers, which may be based on income, age, ethnicity, education, and other character traits and behavior.

 

Accessibility—Convenience is key to consumer interest. This might include adequate parking, wheel-chair accessible ramps, or easy-in-and-out retail stores.

 

Tenant mix—A group of anchor tenants can draw a necessary consumer base for other, smaller tenants within a shopping complex. Creating an optimal mix of merchandise is essential to property value.

 

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