Multifamily vs Retail

9 Replies

Whats a better investment multi famialy or retail. Most of the retail plazas  for sale near me have about the same noi as a 100 unit apartment complex and the retail plaza is a few million cheaper also. So what's better to me it seems like retail is better in my situation. Is retail more complicated than multi famialy?

and also it looks like expenses on retail is cheaper than m ultifamialy. But can you increse the noi. on retail?

Hi Kyle,

On the asset class cycles Retail for multi-strips has some great value right now. Multifamily is about at it's peak so is really frothy to buy into.

I do both asset classes for my specialty but I am doing more with clients on retail currently.

Retail typical on strip centers is 2% annual increases in rent. Multifamily averages around 3%. Inflation is about 2 to 3 % a year so value of the dollar you are keeping pace on about a breakeven scale.

Most retail is base rent per sq ft with NNN cam tenant re-imbursement. Financing available depends on size of the strip center and loan size. I usually have to see clients financial statement for liquidity and net worth before I advise what makes sense for properties and structure.

Increasing NOI is only one component of value. Buying before the cycle runs up and gaining cap compression is another factor not really available in multifamily.

For example if multifamily has caps at 6 there is not much further for caps to compress. Those same multifamily properties were selling for 8's and 9's 2 to 3 years ago. So the owners now with rent increases and cap compression have a hefty return to sell off with to 1031 exchange tax deferred into other properties.

With retail strips you look for leases with under market rents so when they roll the tenant you can bring to the rising upmarket.

Lot's of opportunity but you can't play around. You have to be committed as a buyer to the process.   

Multifamily makes more money, but is 100x the headache. 

This is a really interesting thread, I look forward to seeing what others with much more experience than I will add to this post.  I think its something that a lot of people struggle with.  I have been working with my parents who own retail since I was 17, so not more complicated by any means just a little different.  I think its worth taking the time to get more familiar with though, its a fascinating subsection of real estate in my opinion! Good luck with everything! 

it's sort of a "chicken or the egg" question.  It depends on a lot of factors.  A few thoughts:

With retail it is in most cases nnn where the tenant pays the expenses.

With residential you get more turnover but a better chance to raise the rent.

With retail you have longer deals usually 5 or 10 years but less frequency to raise rents.

@Account Closed you mentioned that the retail and multifamily you have similar NOI so the NNN rents, cam reimbursements, doesn't really matter. At the end of the day, you are getting the the same cashflow.

Secondly, retail is not necessarily more complicated than multifamily.  Sure there are CAM to deal with and your tenants are businesses, not people, but in my experience - if you can clearly understand all the leases before you buy retail, than you'll be fine.  If you hire a property manager, then the "complications" of managing a retail property are mitigated.

So let's assume that the same NOI and you hire a property manager for either case (taking cash flow and management headaches out of the scenario), I believe why you are finding retail so much cheaper and what you must consider is that most investors would agree that multifamily is more stable, since population is growing, people always need roofs over the their heads, and you can generally find a renter if you lower the rent enough. Retail on the other hand doesn't have the absolute demand which multifamily does. Business go south and will vacate the space, storefronts close because of online competitors, people work from home, or vacate restaurant spaces to own a food truck, etc etc..

IMHO, retail carries added risk for the reasons mentioned above but obviously with added  returns.  It's a natural progression to move from multifamily to retail once your portfolio is large enough to absorb the vacancies of a retail property.

Interesting discussion...

@Joel Owens , What kind of retail center you recommend? As this discussion is 2 year old, still there is good market to invest in Retail?

  • How many units minimum
  • New construction/Established
  • Class A/B/C

Here are Pros & Cons from my perspective...

Pros of Retail

  • Long Term lease
  • Less turn over
  • NNN + CAM
  • Easier to manage than MF

Cons of Retail

  • Longer vacancy
  • More economy impact
  • Complicated lease structure

Hi Shital,

Retail is alive and well.

I usually have a call with prospective clients to determine what their needs are.

For centers there are stabilized, value add, and building from the ground up.

Ultra high net worth investors that are my clients tend to like to buy stabilized for their first one. They are wanting mainly passive cash flow.

On the higher end of the spectrum you say a 3 unit with Starbucks, Aspen Dental, and T-mobile all with 10 year leases that are brand new. Those go for about a 6.5 to 6.8 cap rate with 30% down and a 10 year fixed rate loan about 5 percent on the rate with a 30 year amortization currently. 7 year fixed is about  4.7 to 4.65 rate.

Next down is a center with say 50 to 70% national tenants and some regional to local tenants. Those are about in the low to mid 7's for cap rate. Last is all local to regional tenants with 1 national to none at all. Those are 8 plus cap rates. You have to be careful because the higher perceived cap rate can turn out to be less if vacancies occur and you have lost rent,TI's, and leasing commissions to pay for.

It all depends  how hard you want to work for yield. My clients that have millions to tens of millions would sacrifice 1 to 2% cash flow going in for a higher quality and less headache property.

Vacancy for smaller retail spaces under 2,000 sq ft do not take long at all to fill if area and property is good. It's the larger spaces junior box up to 10,000 sq ft or larger box that can take awhile.