Analyze Retail Commercial Property?

[Russell Gronsky]

Fellow BPers,

I found a commercial retail property (strip mall) that I am interested in but I have no idea how to evaluate it. I've never done any strip malls before. How do I run the numbers? How do I know if this is a good deal or not?

[Joel Owens]

Hi Russell,

Lot's and lot's of metrics go into evaluating strip malls. I look at over 500 a week for clients all across the country.

Just like anything there are bad ones, okay ones, and really good ones.

A lot has to do with your goals. If you want to stay mostly passive then having all national tenants tends to give the most stability. Cap rate and cash flow averages drop for having that consideration.

When you move up to the next spectrum for yield you have some mom and pop to regional tenants mixed in with the nationals. The cap rate tends to be higher and the cash flow more. Occasionally a tenant will roll over in those types of centers. You will need TI's and leasing commission reserves for the new tenant to go into one of your spaces in the strip center.

Most risky is mom and pop dominated strip centers in far out suburban to rural locations.

You have to know if you have all gross leases, all NNN, or a mix of the two. Reviewing the lease abstract of each and every tenant is critical to analyze the risk exposure to the stability and cash flow stream of the property over time. Staggered leases is important so all of the leases do not come due at the same time. You want where if you experience a vacancy or two then your break even occupancy to service the mortgage after down payment is still below that. A lender as part of the appraisal will generally look at a "stress test" for a center. That projects out what will happen if this event or that event happens down the road and what kind of reserves will need to be in place to weather a storm and still come out intact.

For national tenants I am okay with blocking of rents to go up every so many years. Not for mom and pop type tenants as you may never see the increases before they fail. We focus on destination type tenants ( karate schools, barber shops, hair salons, nail places, restaurants, doctor offices, environmentally friendly dry cleaners, etc. ). These are places people have to drop money for a service and they can't look around and then buy online cheaper. 90% of retail failures  last year were clothing and furniture store related so I avoid those like the plague. You also want diversity of the space size for tenant mix. You do not want one tenant taking up 50% of your center unless it's a very long primary term lease and a national tenant that has strong books and a solid financial rating.

Asking if the leases require disclosure of annual sales for each tenant is good to have as well. Especially if the tenant is a franchisee.

Couldn't even scratch the surface but but ran out of time to post more.

Hope it helps some.