Is it good to acquire shopping centers?

Question

I am curious about shopping center investing, how is it similar to apartment buildings, what's the difference in terms of operations and operational expenses, etc?

Mohammad El Sahlah · Answer

I as well listened to the podcast as well. I recommend you listening to the podcast as it has some serious value and adds differentiation between the two

Michael Flight · Answer

Hello Arturo,  shopping centers are very unlike other real estate investments in that you should also know a little bit about retailing as well as the real estate part of the business.  Shopping centers/retail real estate can be a great way to build wealth.

Retail real estate provides for investment stability with leases of 5, 10 and even 20 years.  The income is consistent (theoretically) and known for longer periods of time.  Since the rent is guaranteed by publically traded or financially strong national and regional retailers you have a higher expectation of the rent being paid at the beginning of the month, each and every month of the lease.   You won’t have the opportunity to take advantage of major swings in rental rates because they are locked in however some leases adjust at 1 or 5 or 10 year intervals according to the Consumer Price Index (CPI) or some have a percentage rent clause

Most retail leases are also triple net (NNN) meaning the tenant pays in addition to rent the real estate taxes, building and liability insurance and maintenance of the parking lot, sidewalks, landscaping and other items that would be considered “common areas” or areas utilized by customers.  With NNN leases the tenant also typically pays for all their own utilities and maintains the interior of their premises plus regular scheduled maintenance (not replacement) of HVAC systems.  A rare form of net lease is called the Absolute Net lease in which the tenant pays all the foregoing items, plus the costs of maintaining and replacing the building including roof, walls, HVAC systems and structural components.

When leasing a shopping center you need to have a group of tenants that are complimentary to each other by bringing in traffic (sometimes called foot traffic).  The equation is more visits = more sales/longer visits = more sales.  For example, a mainstay of shopping centers is the grocery store, supermarket and/or pharmacy.  All people need to eat and most people need to go to the grocery store at least one time per week.  That drives traffic to the shopping center which then creates the opportunity for other ancillary stores and services like dress shop, women’s shoes, dry cleaners, coffee shop, etc.

A few major negative aspects of retail real estate investments are 1.) Require a certain level of experience and relationships with retailers/retail broker representatives 2.) Require major capital if you need to replace a tenant (comissions, costs to white box and tenant improvement costs). 3.) Changing retail landscape with internet and retailer bankruptcies. 4.) Lower leverage than multi family (typically 60%-75% LTV.

With all that said, retail real estate is an excellent asset class to create consistent returns and build up wealth.  Almost everyone needs to buy something at some point in time.

Ryan Cox · Answer

@Arturo Borges

Primary difference is that you are renting to businesses vs individuals.

Retail leases tend to be for longer terms than an apartment lease.

Retails leases can be structured in a number of different manners i.e. Percentage, Net, NNN, or Gross

Gino Barbaro · Answer

@Arturo Borges

Hi Arturo

there are few similarities. They should both be run as a business. The value in shopping centers is the leases you create with tenants.  When the economy is expanding, owners need to rent space. But, with Amazon and internet shopping, the strip mall will continue to suffer gaunt forward. I would look to invest in A areas, high traffic and desirable areas, and look for centers with value add opportunities.

One way to invest is to owner occupy.  Great way to pay the mortgage and to build wealth

Gino

Sam Grooms · Answer

@Arturo Borges, it might be helpful to combine this with your other questions about shopping centers.

Is it good to acquire shopping centers?

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