Retail Real Estate 101: 6 Questions and Answers

Mar 14
Retail Real Estate 101: 6 Questions and Answers

Whether you want to invest in commercial real estate (‘CRE’ sectors, such as retail real estate) or get the best deal on a lease, understanding the fundamentals of commercial real estate can help you make the best decisions.

Let’s begin with a definition: what exactly is commercial real estate? Any real estate utilized solely for business reasons is referred to as commercial real estate, also called commercial property. From a small mom-and-pop business to a large office complex, CRE is all around us.

It is a vast category of real estate that is required for almost every commercial operation. While commercial real estate can be bought or sold by investors, it is most commonly leased to individual business owners. Businesses may lease office or warehouse space, while stores and restaurants may lease space in shopping centers.

1) What are the main sectors of commercial real estate?

The commercial sector comprises real estate used for commercial reasons; common categories include office spaces, shopping malls, retail, hotels, and other commercial spaces.

Investment-grade office buildings are often divided into three tiers based on their location, amenities, and overall quality. Class A buildings are of the greatest quality, with cutting-edge amenities and services and exceptional accessibility. Class A offices generate above-average rents.

Class B buildings are expected to have suitable amenities and to be in good shape. Class B offices have tenants who pay the market cost for the space on average. Class C buildings are anything less than a Class B building, with tenants that use the structure for its utility and pay a below-market cost for the space.

The size and scope of investment retail properties range from a single coffee shop to shopping malls. Multi-tenant and single-tenant retail properties are the two basic categories of retail assets.

A multi-tenant property can be two or more different buildings, such as a strip mall or community retail center, or it can be a single large facility with multiple independent tenants, such as a mall. A single tenant property of any size, such as a little café or a big box chain shop, can be considered.

2) What are the benefits of owning commercial real estate?

While the stock market remains volatile, and less risky asset classes such as treasuries produce little return on investment, commercial real estate continues to provide investors a favorable risk/reward profile.

Here is a quick overview of the benefits of owning commercial real estate.

1) Profit

The promise of profit is the initial reason why anyone would want to invest in anything, and CRE offers a lot of it. Because of the increase of rental income, you can achieve your ROI sooner. And, because we’re talking about businesses here, the rent can be much higher than in a residential building.

2) Lower Risk

CRE is also less volatile, which is one of the reasons investors like it. Clients can sign long-term lease agreements for as long as 3-5 years, and occasionally even longer. By doing so, you’ve already guaranteed your profit for the next half-decade or more, independent of future economic fluctuations.

3) Tax Benefits

Keeping a commercial property in good shape is a difficult and sometimes costly task. The Internal Revenue Service understands this, which is why it provides tax breaks to business owners, particularly on expenses linked to upkeep and maintenance.

4) Conscientious Tenants

When it comes to upkeep and maintenance, you’ll be relieved to find that it’s a lot easier than it is for residential buildings for two reasons. For starters, your clientele are also business owners, so you may anticipate a higher level of professionalism.

Second, because the majority of them are businesses that sell goods and services, they’ll be worried about their image and will make every effort to keep the premises as clean and well-kept as possible.

5) Less Competition

Residential property investment is incredibly competitive. Expect your competitors to be less in CRE because to their larger structures. Furthermore, CRE provides a wide range of diverse establishments. The more precise your niche, the less competition you’ll face and the more clients you’ll attract.

3) What is retail real estate?

The retail real estate industry is a subset of the commercial real estate sector. Retail, hospitality, office, and industrial real estate are just a few of the industries that make up the commercial real estate market.

The retail real estate industry is highly specific, and it includes businesses that construct and develop shopping and entertainment centers. Shopping malls, florists, exhibition shops, and other retail real estate properties fall under this category.

To put it simply, retail real estate refers to buildings that are solely dedicated to marketing and selling consumer goods and services. Shopping malls, dry cleaners, pop-up stores, supermarkets, and cafes are just a few examples.

4) What is a retail real estate asset type?

Property types used to market and sell consumer products and services are known as retail property types. Single-tenant retail structures, small neighborhood shopping centers, larger shopping malls with grocery store anchor tenants, and “power centers” with huge anchor stores all fall under this category.

5) What are the types of retail real estate?

Here’s a quick overview of the main types of buildings for CRE.

1) Malls

On the retail scene, these properties are arguably the easiest to spot. Mall shopping locations are usually enclosed, with the majority of the stores located beneath a roof. They frequently feature major national department shops as anchor tenants and a high concentration of niche retail and fashion.

Food courts have traditionally been found in malls, but full-service restaurants and other applications are becoming more frequent. Their sizes typically begin at 400,000 square feet, with no upper limit on how large they can be.

2) Lifestyle centers

Lifestyle centers, a form of retail property that first gained popularity in the 1990s, are essentially premium malls without roofs, however they may or may not feature a department store as an anchor.

Lifestyle centers, like malls, have an in-line tenant lineup. A lifestyle center can be a good real estate investment if the retail tenants match the local area’s demographics.

3) Factory outlets

Most people can recognize an outlet center, which is often mistakenly referred to as an outlet mall (despite the fact that the great majority are not enclosed). Of course, they’re recognized for outlet stores run by well-known national brands, ranging from mid-priced to high-end.

The variety of foods available is frequently limited. Factory outlets typically range in size from 50,000 to 400,000 square feet, but can be larger, and operate well in high-tourism locations.

4) Power centers

Power centers typically have at least three big-box stores such as Best Buy, Home Depot or Walmart. A mix of national and regional brands of smaller retailers can also be found here.

If power centers are located near major highways and have strong anchor tenants who can commit to long-term contracts, they can be a good investment.

5) Community centers

These are sometimes referred to as “strip malls” or “shopping centers” by the general public. The size of community centers varies between 125,000 and 400,000 square feet.

These properties typically contain at least two anchor tenants, a discounter and major specialty shops, and convenience merchants including drugstores, dry cleaners, tailors, and cell phone stores. Neighborhood centers usually feature fewer clothing retailers than community centers.

6) How does a retail lease work?

A retail lease is a legal agreement in which a party agrees to rent a retail property from another party on certain terms. A lease provides the lessee (the renter) usage of an asset and regular payments from the lessee to the lessor (the property owner) for a predetermined number of months or years. For the lease to stay valid, both the lessee and the lessor must adhere to the contract’s provisions.

Though the essential premise is the same – the exchange of property usage for money – there are a few distinctions between commercial leases and the kind you’d sign if you were renting a residential property.

For starters, commercial property tenants are less protected by the government. It is considered that if you are taking on a commercial property lease, you should be familiar with running a business and, as a result, will be better equipped to the duty than someone renting their first apartment, for example.

Side Note: Check out the latest retail real estate leases signed in South Florida.

In a commercial lease, there is also more potential for negotiation, because both parties are often thought to have a greater understanding of business procedures, and hence are more likely to approach negotiations with realistic goals in mind.

A commercial lease will often cover the following items:

  • Type of property
  • Address of the property
  • Length of tenancy as well as whether it is for a set term or one that can be renewed on a regular basis.
  • The amount of rent that will be charged and when it will be paid
  • Which types of businesses are permitted to operate on the premises
  • Who bears the cost of any leasehold improvements
  • The terms of the security deposit

The lease is governed by the laws of the jurisdiction in where the property is located, not the laws of the jurisdiction in which the parties may reside. The property’s local council will handle any disagreements.

If you have any questions related to South Florida retail real estate and assets in the area, feel free to contact us directly.

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