How to buy a small shopping center?

Question

Hello

My dream was always to own a multifamily and rent it out. But the more I study residential, the more I realize how much I hate it. it's just problem after problem. I have heard commercial real estate is less of a headache. is that true? How can I buy a small shopping center? I am talking about those shopping centers that have 5 stores and a small parking lot. one of the stores is like a tailor shop, another is like a nail salon, maybe an indian grocery store. you know what i mean?

I know "if you are asking this question then you are not ready" I get it. but how can I learn more? which website lists these properties? I dont see them on zillow or redfin.

Evan Polaski · Answer

@Ross Kane, I love the retail space.  I agree that, at a high level, when investing in residential: you are investing in someone's home.  They are there before work and after.  You can have calls 24/7.  And, you often have a lot more tenants, dollar for dollar invested.

But, there are a lot of risks with commercial properties that are less prevelant in residential.

First, everyone needs a place to live.  Not everyone needs to/wants to start and run a business.  So, where you can pretty easily count on 95% occupancy in many good residential areas, retail can have very long, drawn out vacancies.

Second, and tied to the first, you need to be in the know on what tenants in general, are seeking, and who the tenants are that are looking for space.  Maybe you can just put a "for rent" sign in your store front, and fill a vacancy, but probably not.

Third, at a larger scale, non-recourse loans are the norm for multifamily.  Retail is full recourse.

Fourth, leasing commissions and tenant improvements are common and expensive in retail.  You have a vacancy, find a salon to want to move in?  Break out a hundred thousand dollars to run all the plumbing, build the dividing walls, etc.  Yes, you can amortize that into rents, but you need the money today to do it.

Fifth, most jurisdictions are a lot slower to approve commercial building plans than residential.  There is a building in my neighborhood which had a 6 month delay in lease start because they couldn't get the new entry door approved.

All in all, I love retail.  It creates some efficiencies that are never possible in multifamily, as you allude to, but it also has a completely different set of risks, many of which I would rank as significantly higher, particularly as you are starting out.

Doug Smith · Answer

We actually did own several strip centers right after the last crash. We bought them as loans from banks, got the properties back from the very delinquent borrowers, stabilized them, and sold them to REITs. Now, I am not sure I would go back unto them unless I really, really got them at a great price in a great location and they cash flowed really well. Retail, like office, scares the bajeezus out of me right now. Outside of running to the grocery store, getting a haircut, or buying a bottle of Scotch, I can't tell you the last time I went to a retail center. I don't think I'm alone in feeling that retail and office space are on the decline with dramatically slowing demand and a glut of existing space competing for fewer tenants. Just my thoughts.

Joel Owens · Answer

If you are interested in retail centers one of the better books is Investing in retail Properties by Gary Rappaport a friend of mine.

If you are interested in single tenant retail I have a free .pdf book on my website I wrote on NNN 21 years so far in the business. I used to own retail centers.

Too much management for me. Retail centers are typically the second most passive of investments and single tenant NNN the most passive. Multifamily buildings are a lot of work even the large ones and you have unpredictable tenants with residential government regulations. Some people that are investors love that stuff but not for me. Even owning hundreds of unit you have to ( manage the manager ) and if you invest in multifamily syndications you have to ( manage the syndicator ).

Good luck

Chris Mason · Answer

The stale old listings, which is the majority, are not fake, but if it's been listed for 9 months, the listing agent already knows what they are and aren't looking for, and can probably tease it out of your email or text. Also, if it's been on loopnet for 9 months... there's a reason.

Once you make a free account on loopnet, you can filter for "date entered" and pick options from "with in the last 3 days" up to "within the last year." I exclusively use loopnet with one of the middle filters (weeks to a few months) turned on. Just to filter out the things that "the market" has already told me is crap. With the filters set to retail and 1 month and >$2m, there are 22 "real" listings in the greater greater metro area I live in. With that same time filter off (still only >$2m), there are 181 listings... So there are about 160 of them that you called "fake," that I would I call "stale and no point in looking at."

For a variety of reasons, a commercial real estate broker is often much more inclined to keep the stale listing for months and years, than a residential realtor is to keep a home listed for months and years. A one year old weathered for sale sign in front of a house is going to get locals (consumers and realtors) saying negative things about the listing agent, the same is not true for a shopping center.

Crexi is the other major website, by the way.

I can share some other tips to filter out nonsense, and make it so you aren't filtered out as much, if you want to chat off line.

Herb Lau · Answer

I'll add to why I'm looking at retail and industrial spaces instead of residential and multifamily.

Yes, it is true that a home is a need way more than a retail or industrial space in general.

But residential regulations have gotten more laborious and more difficult to deal with than they were 20 years ago.

And the conversations you need to have with residential tenants vs commercial is different, and for me, that is important.

Knowing what tenants want is invaluable in any part of real estate, and undoubtedly getting to know what potential retail and industrial tenants need and want is harder and takes more research.

But with all that, I'd prefer retail or industrial as investment real estate targets.

John McKee · Answer

The authority on this subject is strip mall guy!  He is on all the social media handles and some podcasts. If I could take all my retail and put it together in a strip mall it would be much easier to manage.  I think one of the sweet spots of this niche is the neighborhood small strip center.  It might have 7 or 8 shops in a very dense neighborhood, without much competition.  It doesn't even need an anchor in some cases.  These are always very full.

https://www.crexi.com/blog/don-tepman-strip-mall-guy

Steven McPherson · Answer

I'm a retail property leasing and sales broker in the DFW area.  The above posters are correct.  Retail is a great investment but requires a significant amount of capital up front for leasing commissions and tenant improvements.  If you are leasing a 2nd generation retail center, you can typically offer several months of free rent to help offset build-out and startup cost.

You can find tenants that won't require those concessions, but these are typically mom-and-pop startups and they bring with them a lot of risk.

Feel free to DM if you want to talk further!  I love discussing these types of things.

Brandon Croucier · Answer

Loopnet is where commercial properties are listed

How to buy a small shopping center?

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