Understanding the Risks and Rewards of Investing in Retail Real Estate
All types of commercial real estate have the potential to be strong investment opportunities. If you’re interested in retail real estate, this long-term investment strategy allows you to bring in steady income if you invest in the right location. While location is important for every form of commercial real estate, it’s even more essential for retail investments. Choosing the right location makes it easier for you to appeal to businesses that may remain in the same place for years. This will allow you to make long-term gains and have tenants that pay year after year. Here’s a closer look at the risks and rewards of investing in retail properties.
Types of Retail Real Estate to Consider Investing In
While the risks and rewards of retail real estate investments remain the same regardless of the type of building you invest in, some property types are known to have stronger, consistent returns. For instance, neighborhood stores are currently displaying stronger performances when compared to shopping malls, and this trend should continue long term. The retail store you invest in will determine the types of tenants you appeal to. The many tenant types include:
- Grocery stores
- Pharmacies
- Banks
- Specialty retail
- Restaurants
- Discount stores
- Big box retailers
- Convenience stores
Primary Risks of Investing in Retail Real Estate
There are many risks that you must consider and prepare for when you invest in retail real estate. Even though these investments are meant to provide stable and consistent income on a long-term basis, there’s a possibility that you may be unable to find tenants or that an economic downturn in the area would significantly reduce your cash flow. Having a comprehensive understanding of these risks should prepare you for making such an investment.
The main risk of investing in retail real estate is that economic conditions will impact the property. While the economy is healthy, retail businesses often flourish. When customers have access to more disposable income, they’ll likely spend it instead of placing it into a savings account. If your property is in a great location, your tenants should be in good shape. However, economic downturns cause demand for retail stores to fall. You’ll need to know how to weather the storm when the economy performs poorly.
It’s also more difficult to locate quality tenants regardless of economic conditions. Finding tenants for retail real estate is different than finding tenants for multifamily properties. In an apartment building, lease contracts last for anywhere from six months to one year, after which the tenant can choose to leave or renew their contract. On the other hand, retail lease contracts usually last from three to five years before being renewed, which means that companies need to be confident before they invest in a new location. You may encounter lengthy vacancies regardless of the type of retail store you invest in.
Potential Rewards of Investing in Retail Real Estate
Despite the risks, there are many possible rewards of making retail real estate investments. For one, these investments usually deliver high returns that may be above 10%. Along with property appreciation, you’ll be able to earn income by charging higher rents over time.
Even though lengthy lease terms make it challenging to find tenants, they also give you peace of mind that you won’t need to deal with the possibility of a tenant vacancy every year. Tenants stay longer in commercial properties because of the high initial investments that are needed to enhance a retail space and make it more brand specific.
You’ll also be rewarded by the lack of expenses that come with retail real estate investments. When you invest in multifamily properties, you may be required to pay property rates for water and other essentials. However, you won’t need to handle these expenses in a retail property. Commercial tenants are always responsible for these costs.
You should weigh the numerous risks and rewards of the retail property you’re thinking of investing in. How you treat each risk and reward depends on the type of portfolio you’re building as well as your current risk profile. Even though retail real estate often provides investors with steady returns, you may not want to deal with long-term vacancies and the possibility of a poor economy. However, this investment has the potential for high returns in the long run.