Five Steps to a Successful Commercial Property Selection

Of course, commercial property selection is a broad topic due to the varied nature of “commercial” properties.  However, the majority of investors are considering retail space or office space for investment.  Let’s look at an overview of five factors that apply to both retail and office space commercial property selection for long term ROI.

#1 Your Investment Goals

Of course, Return On Investment is always the primary goal.  However, there are other considerations before a substantial investment involving commercial property selection.  Are you seeking a passive role, active management participation, or something in between?  Commercial properties require a great deal more management and sales/marketing activity.  If you do not wish to be involved, you’ll take a different approach to commercial property selection and your role.

Perhaps you’ll join others in a partnership, with some partners only involved monetarily and others also taking a management and marketing role.  If you want to be hands-on, your commercial property selection could be a smaller office complex that will not require as much of your time.  Before setting out to research properties, have your target price range, investment objectives, and involvement level figured out.

#2 The Local Economy – Business and Consumer

This is an interesting factor in commercial property selection because you may not want to rely solely on your business clients’ economic research and outlook.  Suppose they’re haphazard about tracking their customer base and demand.  Or maybe they’re not very diligent in other areas of market research that could create stress in their business in the near future.

You want to do two levels of research, business and consumer.  Let’s use a small retail strip center as an example.  It’s been a good investment for the current owner, but they’re retiring and want to leave the area.  It has five units, currently a nail salon, barber shop, small organic grocery, to-go barbecue place, and a payday loan business.  They have been fairly stable tenants and rents are mostly at market rates.

However, what’s going on in the local economy?  They’re in place and likely just struggling to maintain sales, not necessarily checking the economy to see if leaving is the right alternative.  Either way, you lose a tenant to bankruptcy or they move to go where the customers are.  Your job in commercial property selection in this case is to not only check their current business health, but also the consumers in the area.  Are they moving away, or is the area growing?  Are major employers relocating?  Will the current demand for these services remain viable for your ownership period?  Are wages dropping such that nail salons and gourmet organic products will be priced out of range for the new consumers?

#3 Physical Location

This is really important, as traffic for retail is crucial, and even office complexes must be relatively easy to access and not too far out of the areas where the customers live.  Just travel the old Route 66 to see what happens to businesses when a new freeway moves the traffic away.  It’s usually not that dramatic, but our example retail strip center could be in big trouble if the previously busy street is modified such that it’s harder to access.  Or perhaps a nearby parallel street is widened so traffic moves to the faster route.

#4 Age & Condition

This is more than just how old the building is and if it is in need of work.  That grocery store could have a walk-in cooler and other equipment that’s reached the end of its useful life.  Keeping it repaired or buying new are both expensive projects to be considered.  How about the roof, heating and cooling, and parking lot conditions?  Even if acceptable condition-wise, a lower offering price may be the best approach.  Are there conditions that may be the target of code enforcement, such as handicap access, etc. that could be expensive to remedy?

#5 Are the Numbers Real Numbers?

You’re going to be checking out leases very carefully.  Sometimes landlords allow tenants to work off lease payments, and the cash flow isn’t really as the lease sets out.  Don’t just check the leases, check the deposits against them.  Are some of the units under-leased or the opposite?  Sometimes a poor negotiator as a tenant will overpay for their space, but when they figure it out they leave and the next one isn’t so gullible.

These are broad considerations, but if you take these steps in Raleigh area commercial property selection you’ll probably be happy with the result for years to come.

Power Centers

A power center is a retail development that is typically a single story, outdoor strip center that includes a number of large, national brand retailers, with very few smaller stores.  It is like a super-sized strip mall.

An example might include a center with retailers like Target, Bed, Bath & Beyond, Old Navy, Sports Authority, Toys-R-Us, Circuit City, PetsMart and more all in a row.

These centers will occasionally have a couple of smaller stores in between the larger ones, but not always.  They’ll have a number of pad sites, usually occupied by fast food, sit-down restaurants, banks or entertainment retail.

Obviously, common areas are typically outdoors and much less expensive to maintain than a regional mall.  While many retailers have found that the ideal environment for them is a regional mall, many others specifically look to be in a power center.

Strip Malls or Strip Centers

The next major property category is the neighborhood strip mall or strip center.  You are likely to be very familiar with these properties. They are typically anchored by a grocery store that draws traffic.  They will then have a number off smaller stores, including national brands as well as some Mom & Pop or boutique retailers.  There are almost always a couple of pad sites, usually for either food or banks.

Something to Keep in Mind

How well a strip mall is doing certainly has a lot to do with location and condition, but many strip malls live or die based on the success of the anchor tenant.  If the anchor tenant is not pulling in traffic or closes, then the strip mall often goes into decline because most of the other retailers are not strong enough to bring traffic to the site on their own.  There are some unanchored strip malls that manage because of a convenience store that draws traffic.  Other have turned themselves into more of a center that is focused on professional service providers that need a little bit of a retail environment, such as financial planners, insurance agents, real estate agencies, personal trainers, medical clinics, and others.  Some of these have even turned the stores into condominiums and sold each store to the tenant occupying it.