Future of small commercial shops?

Question

Hello everyone !

My father owns number of small shops which are all rented out and generating a good rental return . Time is changing fast and number of people now prefer to shop from malls and big stores . Though rightnow he recieves good amount of rent but capital appreciation is very slow since past few years . Whats is going to be the future like , will value of these properties fall in value in the long run ? Is his investment strategy going to fail? Whats your take on this , guys??

Daman Gandhi · Answer

@Joe Splitrock

I believe the same .My father keep on defending his strategy and still believes small shops has a good scope to generate wealth fast .

Joe Splitrock · Answer

Even malls and big box have seen a huge business hit due to the shift to online shopping. COVID-19 has only accelerated the shift to online purchasing. Small store front will always be needed for service businesses. Coffee shop, cell phone store, gym, tanning, hair salon, insurance agent, dentist, convenience store, etc. Some of these functions have moved to bigger stores or are popular in malls too. Small retail shops are difficult. I think commercial real estate is in for a tough time the next few years.

Matthew Irish-Jones · Answer

@Daman Gandhi I don't think I agree with you on the malls.  They are in trouble.  I think its impossible to answer your question without knowing the specifics of each location and rental figure, as well as the business that resides there.  There are highly coveted commercial spaces in every town and city regardless of the market.  If you have some of those locations you should be in a good spot.  Overall, if it ain't broke don't fix it.  I would look into the business and how its impacted by Covid 19 though .

Josiah Patrick Zebarth · Answer

@Daman Gandhi

Hey, Daman!

You are right to be anticipating some decline in commercial properties. Everything is moving online and smaller combines aren’t going to move towards buildings but instead websites. Although commercial is on its way down, I predict there to be a small rise after the Covid 19 pandemonium is ended, in usage of things outside the house, this includes business that use commercial property.

Just my two cents.

Best,

Josiah

Joel Owens · Answer

If an investor is SMART when they bought a retail center PRE-COVID, MID-COVID, or POST-COVID and you have mom and pop tenants you do not want to buy the cap rate on the premise of market rate rents. Instead you buy a high cap rate center with way BELOW market rate rents. That way if a tenant goes out you might be able to improve the credit quality with a regional or national tenant at higher rent rates and compress your cap rate value and grow NOI.

The retail centers that will get pounded are those to the side, behind other buildings, poor sightlines, etc. where only mom and pop tenants wanted them because rent was lower in a nicer area. Those tenants could not afford the higher rents from direct road frontage and sightlines with nice larger back anchors like a Wal-mart, Super- Target, Home Depot, Costo, Lowe's, etc.

Those mom and pop tenants did fine with lower rents and straggler customers willing to drive and find them. Now those tenants will be hard pressed to make it with reduced sales. I can see more conversion to medical offices and essential based businesses.

There is value in various asset classes. You have to know how to spot the trends and capitalize on them.

Ronald Rohde · Answer

We don't really have enough information to make a judgment. There is an even broader range of "small shops" than STNL retail, i own a gas station, etc.

The short answer is, always maintain your property, be aware of your tenants' needs and have cash reserves to remodel or reposition the assets to generate the highest rent. If you do that, you'll always be fine.

I personally think small retail locations are great for experiences, immersive dining or axe throwing, then purchase, etc.

James Storey · Answer

In my experience, a lot of commercial investors will defend an investing strategy if it is something that made them wealthy with not realizing that trends change slowly over time. I can't tell you how many times it financially makes sense to sell a property after the going was getting good but the owner will find reasons to hold and continue until it's too late. Long story short, it's hard telling how your dads retail investment will far through this pandemic and into the future without knowing the details. This could be a Rockstar property in an amazing location that can be repurposed from retail.

Right now, commercial investments, particular retail purpose commercial is in for some hurt in my opinion. The mixture with low interest rates compressing CAP rates and demand for retail space diminishing, we will more than likely see stagnant rent growth and rising cap rate (as interest rates increase). Really, this is typical of the end of any business cycle but retail is just another mix and will go through some major changes. Just my two cents.

Joe Splitrock · Answer

He has probably been doing it a while and when you are committed to something, it is sometimes hard to see external threats. You are younger and see the trends as your friends buying habits are shifting. Keep in mind that even if the small shops close, it may be possible to convert the space to something more relevant. That is the great thing about real estate.

Ken Jernigan · Answer

Small strip centers without a grocery anchor will face incredible challenges this year and next. Most of the businesses that occupy these centers are customer facing and have less than one month cash on hand. Independent and franchise restaurants, nail salons, spas all will see their numbers fall. This will back up into banks, so expect to see short sales and foreclosures. Opportunities will be out there but only for the liquid. Money will be cheap for some time to come, but lenders will be afraid to put it out.

Future of small commercial shops?

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