Commercial property types – retail stores
Retail store operations are another form of commercial property investing. Stores can be found as part of small strip malls, neighborhood shopping centers, community shopping centers and regional shopping centers (for example, indoor malls).
Strip malls, those sets of small store buildings that tend to line both sides of busy commercial streets in every town around the country, make for a great entry opportunity for the small investor. Small two or three store buildings may actually be less expensive than purchasing a residential duplex or triplex house. And because tenants usually are placed on longer term leases, turnover and vacancy rates are traditionally lower as well. This makes managing the property easier too. Most strip store leases run three to five years, and usually include renewal options.
One key element to remember about strip malls though, is that building profitability is directly related to the profitability of the tenant businesses. If a tenant is not doing well, regardless of having a lease, they may be forced to close down – and you’ll need to find a new tenant. But if their business is a success, they’ll want to stay for longer periods, and rental increases are more easily accepted. The landlord will want to help the tenant’s business out as much as possible due this symbiotic relationship. Many leases are graduated leases, which start with a low rent in some initial period, then gradually increases as the tenant’s business increases.
Small shopping centers
Small shopping centers are situated close to residential neighborhoods for easy driving access to basic goods and services. Usually there is an anchor store of a supermarket, with many personal services stores surrounding it (like dry cleaning, laundry, barber shop or pharmacy). These centers also have plenty of available off-street parking associated with them. Leases for business in these centers usually will include a minimum rent plus some form of override – a small percentage of their gross sales will be added to (or drawn against) their base rent.
Community shopping centers
These types of retail centers are usually characterized by a much broader range of goods and services being offered, to a larger geographic area. Here, anchoring tenants include major department stores in addition to a supermarket. Movie theaters, large appliance dealers and furniture stores are just some of the fixtures that comprise tenants in these centers. In many instances, these groups of stores will be aligned as an outdoor mall. And due to the larger size of the centers, many competing business may be found there.
The greater the size of the center also requires the use of a professional management company to run the entire property. Lease terms for larger tenants may run 15 to 20 years, while smaller tenants may have lease terms that run between 5 to 10 years. Leases are traditionally of the “percentage lease” variety, with base rent being augmented by a percentage of gross sales, with annual adjustments.
Regional shopping centers
Regional shopping centers are comprised of large outdoor or indoor malls, that service areas from 15 to 20 miles away. Like in a community shopping center, businesses tend to be grouped together around several key anchor department stores. A full-time manager is required on-site at all hours of operation, but full-time maintenance crew and security personnel are also required costs for the center owner(s).
photos courtesy of warrentemplesmith.com, interstateauction.com, wesparkle.co.uk