Retail commercial properties are properties that are commercially zoned and used for business purposes only. These properties cannot manufacture goods; instead, they can only sell products.
Common examples of retail commercial properties include malls, shopping centers, and retail stores.
Retail commercial properties present a far greater income potential than single-family homes. Typically, retail commercial investors expect annual income percentages of 6-12% (depending on inflation and other economic factors). Compare that to the 1-4% annual returns that single-family home investors typically expect.
Inflation rates have reached an astounding rate of 6.2%. Inflation, however, could work to one’s advantage in the commercial real estate market by decreasing the amount of debt you owe while boosting your principal value of the real estate you own.
In this article, we’ll break down the types of retail commercial properties, explain financing options, reasons to invest, where to buy, and much more.
Let’s dive in.
Types of Retail Properties
Shopping Centers and Malls
Malls typically contain an enclosed area with multiple stores and/or restaurants attached. Some malls are built around an “open concept.” Most malls cater towards retail and apparel vendors.
Shopping malls present a way for retail investors to diversify their investments. Malls contain multiple stores—if one store goes under or can’t pay rent, the investor won’t suffer a huge financial loss.
Additionally, unlike residential real estate, mall tenants are extremely unlikely to damage property. Tenants have an incentive to keep their building in prime condition to attract customers walking by.
Malls can be a great addition to any retail commercial property portfolio—they’re proven to provide steady returns over a long period of time.
Lifestyle centers offer a modern, open variation on traditional malls.
Specifically, they’re shopping centers or mixed-used commercial developments that combine traditional retail functions of a shopping mall with leisure activities. They’re often located in expensive areas and orientated towards upscale consumers.
In terms of tenants, lifeStyle centers often contain smaller chain stores, dining establishments, and entertainment options.
As the world reemerges from lockdowns, data reveals a 6.8M increase in visits to lifestyle centers from August 2020 to April 2021.
If you’re looking for a safe, diversified addition to your commercial real estate portfolio, lifestyle centers might be a great option.
Power centers are real estate centers that typically include at least 3 massive, national stores. Think: Walmart, Target, Home Depot, Lowe’s, etc. They share the same parking lot, and they’re often surrounded by other “pad sites” occupied by restaurants, fast food operations, banks, and other well-known tenants.
Power centers typically spread out horizontally; however, they’re also built vertically to save space in densely populated areas. Older malls are often renovated into power centers.
Power centers generate a large amount of foot traffic by bringing together large, powerful retailers.
Multitenant: Strip Malls
Strip malls are another common type of retail commercial property.
Often anchored around a grocery store, strip malls generate a high amount of foot traffic. Other tenants within the strip mall often include smaller mom and pop stores, boutiques, as well as national brands.
Strip malls without an “anchor tenant” are usually occupied by professional service businesses—insurance agencies, clinics, real estate agencies, and more.
Even despite the recent pandemic, strip malls are still a viable asset class for real estate investors, either through direct purchase or through REITs (real estate investment trusts).
Mixed Use: Community Commercial Retail
Community commercial retail properties are also known as “urban street retail” or “mixed-use” properties. These retail shops are typically found on the first or ground floor of a larger office or multi-family building. Located in the urban center of large cities, they can provide a steady source of income for real estate investors.
Community commercial retail properties are all about proximity. They integrated planned shopping areas in close proximity to residential neighborhoods, thus increasing foot traffic and exposure for businesses. Convenient access helps boost day-to-day shopping and revenue for these businesses.
Reasons to Invest in Retail Commercial Properties
Depending on your state, most tenants of residential properties turnover every 6-12 months. Commercial tenants, however, experience a much lower turnover rate—typically between 3-10 years.
Additionally, retail commercial property tenants tend to stay longer at a property when they’ve invested capital to customize the retail space. As a landlord, it’s often a good idea to give your retail renters leeway when it comes to designing their space because this capital investment incentivizes them to stay longer in the space.
High return on investment
Commercial retail investment properties often generate returns of anywhere between 8-12%. Compare this to the average rental return for residential properties, which hovers around 3-5%.
Minimal rates and other expenses
Landlords of residential properties are typically liable for paying property rates like water, body, etc. This isn’t the case with commercial properties. Instead, your commercial tenant will be responsible for those expenses, which means less money from your pocket.
Small deposit requirements
Commercial retail properties are typically priced cheaper in comparison to the average residential property. That means, to purchase the property, you’ll only need to front a small(er) capital amount. For example, a small apartment complex might cost upwards of $300,000. A small retail space in the same area might cost as little as $90,000.
Financing Options for Retail Commercial Properties
When it comes to financing retail commercial properties, you’ll have multiple options, including bridge loans, CMBS Loans, bank loans, construction loans, small balance loans, permanent financing, and mezzanine loans.
There’s no one-loan-fits-all approach to financing retail commercial properties.
Instead, it’s important to talk to your lender in order to determine the style and size of loan that will best fit your needs.
Where to Buy Retail Commercial Properties
When it comes to retail commercial properties, the old adage rings true: location, location, location.
Markets in some areas might constantly struggle; other areas might constantly support lucrative markets. Location also matters because customers need to be able to find your property and parking.
Typically, urban areas like Charlotte, Boston, Dallas/Ft. Worth, Orlando, Atlanta, Los Angeles, and Seattle are great locations to invest in retail commercial properties.
Don’t go through the property selection process alone—instead, consult a real estate lawyer and an accountant. They can help you find the best options.
It’s also important to analyze the property. Investing in retail commercial properties is not the same as investing in single family homes. It’s a business—the numbers need to work. Plan for repairs, maintenance, upkeep, security, and your break even numbers.
Property managers deal with the tennants issued so you don’t have to.
They also help with creating/maintaining a budget, getting preferred pricing on services (ie HVAC, plumbing etc) and conducting inspections of the premises.
What tax benefits am I eligible for if I purchase retail commercial property?
Retail commercial property owners are typically eligible to receive tax benefits like depreciation and 1031 exchanges.
What are some of the common expenses I can expect as a retail commercial property owner?
While there aren’t a lot of fees that the tenant doesn’t cover, there are some fees and conditions that, as the property owner, you might have to deal with.
Examples include business license taxes, environmental cleanup costs, and commercial sewer costs (these can be mitigated by contracting a triple net lease).
Retail commercial properties can be a great investment.
Not only do many of the responsibilities fall on the tennant, but tenants are also likely to stay in their leases longer.
Rates are often more lucrative—they often even touch 10-12% in terms of annual ROI.
Owning retail commercial properties is a great way to diversify your portfolio and avoid the harsh “invisible tax” of inflation.