Many new commercial real estate investors mistakenly believe that it is easier and more profitable to buy a commercial retail building then it is to buy an apartment building. The general consensus is that retail tenants are better renters while it is more of a hassle to deal with the management of apartment building tenants. In my opinion, nothing could be further from the truth. Here are some common myths about commercial retail properties versus commercial apartment building tenants.
1) It is easier to find a good retail tenant. This is actually false. The retail sector of the US economy has not been performing well when compared to other areas. Many retail stores find it especially difficult to compete with big box stores like Walmart and Target. Small retail stores are also facing increased competition from stores on the world wide web. Internet retailers have a lower overhead and they are able to sell the same products at a lower price point. Internet retailers may not be subject to the high costs of commercial property insurance, retail rent, sales employees and certain business taxes.
2) Retail space is in high demand. While this may be true for high traffic areas in certain geographic regions, in general, it takes an average of six months to rent out a commercial retail space. There is simply a smaller pool of potential applicants in the commercial retail sector. On the other hand, every person living in the United States needs to have a place to call home. With the recent meltdown in the residential real estate markets we are seeing more and more people looking to rent rather than buy. The average time to rent an apartment building is as short as 30 days in some real estate markets.
3) It is easier to manage a retail space. Many commercial real estate investors don’t realize that it is usually necessary to “build out” a commercial space before it is rented to meet the specifications of the tenant. This can cost the owner tens of thousands of dollars. Meanwhile, apartment building units are usually standardized to meet the needs of the most people.