Investing in strip shopping centers has been a productive market segment for decades. However, there are some issues with this real estate sector that require some special consideration to ensure that it will meet your investment needs. So what are the dangers to strip shopping center investing?
The credit quality – and financial stability – of the tenants
The typical strip center has only a hand full of tenants. As a result, if one shuts down, it can impact your revenue stream by 20% or more, and this will be extremely harmful to your returns or even covering the mortgage. As a result, it is imperative that you have a solid handle on the financial strength of all occupants. If there’s a tenant with little financial strength (Tom’s deli or Sally’s doughnuts) you need to budget accordingly for their potential demise, vacancy, and making the space ready again. You cannot pay the same for a retail property with weak tenants versus one with highly ranked ones. It’s a matter of credit risk.
The future desirability of the location
Real estate is all about location, location, location and retail is no different – in fact it’s even less forgiving regarding this important component. As a result, you must only invest in areas that have a solid future. Too many strip center investors do poor due diligence on the future desirability of their location and find that five years later the “hot” corner is up the street and they now have a “B” location. This will impact their occupancy and rent levels, and these never really come back.
Deferred maintenance of the structure
Many strip centers are a half-century old. Some are made of durable bricks and others of less-durable stucco over wood. Some have new roofs and others are still limping along with the 1968 model. It’s important for any strip center owner to have a complete mastery over how the facility was built and what costly repairs are needed in the future. Remember that a single capital investment can reduce your financial return significantly, and you have to plan for these in your budget and purchase price. To stay in-demand with tenants, you will have to continually update your property, and nothing comes cheap with a retail center.
The perpetual impact of the internet on the retail sector
Retail across America is currently at-war with the internet. Amazon now rules the merchandise market and the carnage is leading economists to predict that 20% of all malls will shut down over the next decade. Although strip centers have defenses against the internet – offering things it can never offer – there is still the need for caution when investing in anything related to the real estate sector. It is not the time to pay full retail.
There are many successful strip center investments in the U.S. This list will keep you focused on some of the risks so that you can mitigate them and ensure that you conduct proper due diligence so that you are never disappointed.