By Christina S. Porter In your Space
Investment real estate comes in all shapes and sizes. These “shapes and sizes” can be broken down to basic asset classes, each with a unique set of characteristics addressing a range of investor needs.
Asset Classes can be classified by use and include Residential Rental Housing, Office, Industrial, Hospitality, Land and Retail.
This week,we’ll take a look at Retail investments. Key considerations when reviewing retail properties are the demographics of their location, such as forecasted employment, household growth, vacancy rates, personal income, new home construction and rent growth.
As with any investment, balance between supply and demand is the difference between success and failure. ■DEMAND: Demand for retail space is dependent on demand for the goods being sold in that space. Demand for those goods is largely dependent on how well they meet the needs of the surrounding population. The ability of the surrounding population to produce the personal income to pay for those goods is buoyed by job stabilization and growth. ■SUPPLY: Current and future market supply is driven by vacancy rates, competing projects, current projects under construction, zoning and possible future zone changes in addition to land available for future competing projects are major factors affecting market supply.
Awareness of current and upcoming economic cycles plays a significant role when choosing an investment. As the economy expands and contracts, the supply and demand of/for each asset class changes. Clearly, the demand for retail space increases with the expansion of the economy as consumers have more spendable income.
Tenant mix (if multi-tenant) should also be reviewed. When evaluating a neighborhood strip center or a much larger power center/mall,tenant mix is key to attracting consumers. The tenants and goods/services they offer need to complement each other. Tenant quality and terms of the leases play a big part in the risk reward ratio. In general, a high quality “credit” tenant and favorable lease terms go with a lower rate of return as these investments are considered more secure.The opposite could be true, but cannot be trusted. A low rate of return does not mean that the quality of the tenant is good or that the risk is lower.
Location is a key consideration. Proximity to larger or smaller highways/freeways or a major boulevard has a direct relationship to the amount of people that visit and subsequently to the size of a retail center. Parking is a major concern; the amount of land relative to the size of the improvements is key. A good rule of thumb is that there can never be too much parking. A careful look at how the traffic flows in and out of the center (ingress and egress) should also be considered.
Retail property investments, when done carefully, can provide steady growing cash flow and appreciation opportunities. Investors can reap the benefits of retail property ownership by either buying entire properties or by purchasing a fractional interest using Tenant in Common ownership.
Contact CHRISTINA PORTER at (877) 4TM- 1031 or TM 1031 Exchange assists investors and planning and executing real estate investment strategies.
Originally published in the Santa Monica Daily Press print edition on February 14, 2007. Read the original PDF.