This post originally appeared on SimonCRE Insights Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
When considering buying a retail center or multi-tenant investment property, there’s much more to explore than just the property age and income stream or cap rate. So, how do you dig up the best corner of a neighborhood?
Here are some tips before you buy an established or newly built retail center.
A good starting point before even opening up the chapter of due diligence is of course to analyze the location. How would you rate its current access and visibility? Equally important, what is the current reputation of the area? But keep in mind, corners can and do change with some redevelopment and re-tenanting.
For example, a Phoenix neighborhood center underwent a major remodel from SimonCRE, which in turn helped revive that corner for the community.
On that note of development, are there any proposed projects in the area (i.e. housing, hospitality, office, or more retail)? Or, are there any planned public improvements by jurisdiction? It is also worth noting if there are any economic redevelopment incentives available by the municipality that would help make development work easier.
How many customers does the center currently get on a daily basis? As mentioned, visibility or how well the anchor can be seen from the road is critical. Take into account the occupancy level, but also the types of tenants.
For example, a barber shop may receive many customers (high-foot traffic) per day that only take up a parking spot for half an hour; whereas an urgent care might have their patients occupying the parking lot for an hour or more and less appointments per day.
Consider whether the current infrastructure in the area can accommodate any increased demand? This is important to know when your goal is to increase occupancy. Are there nearby competitors of your tenants’ that could steal foot traffic easily?
It’s not enough to just know the occupancy rate. You need to know who makes up the center in order to get an accurate understanding. Does the center have many corporate high-credit tenants, or is the majority more mom-and-pop shops?
While you analyze the mix of businesses, look for any exclusive use clauses in the leases of the existing tenants of the shopping center.
For example, if there is already a suite leased to a coffee shop chain you may not be able to lease one of the vacant suites to a local coffee shop user.
In the same token, are there any restrictive uses woven into their leases? For instance, is there any language that prohibits a fitness user to be signed into the center due to the amount of parking that would be taken up? Use restrictions that originated from surrounding properties can also be recorded against the property that you are vetting out for purchase.
For example, Walmart restricts a lot of uses when they are the first tenant of a large center, and those restrictions run with the land (even if portions of the land are owned by different entities).
Do any of the tenants have a specified co-tenancy clause? If so, this could mean if your anchor leaves, this tenant has the contractual right to vacate as well. Here are other important lease items you may not already know about when it comes to a multi-tenant center.
Even properties in the best of locations may need a face lift (or new roof) that could add up, so be sure to factor that into your purchase decision. Your due diligence efforts should include a physical component. Make certain that you create a budget for both immediate and long-term maintenance requirements (i.e. HVAC, roof, parking lot, etc.).
If you don’t have much experience in the development portion, or even the passion for that matter, this is where the experts can come in. Consider hiring a developer that has specific knowledge of a successful redevelopment process for the market the property is in to alleviate the risk of cost overruns or construction challenges.
So, when exploring a new retail center investment opportunity, be sure to follow the main items and examples listed above before committing to the close.