How Location Affects the Stability & Value of Retail Real Estate

Location! Location! Location!

This video and blog post cover the basic elements of a commercial real estate location impacting its stability and therefore its long term value and desirability. Some of these factors are specific to retail properties and shopping centers, however, the fundamental concepts are critical to understand for any real estate investor or business owner. There are many other other factors but here is a basic overview:

You should definitely be aware of these if you are: 1) you are a real estate investor considering a purchase of commercial real estate, especially retail, or 2) considering a space for lease to operate your business.

Nearby Attractions, Landmarks, and “Anchor Tenants”

If the commercial property is located near a popular establishment (or has a popular establishment within it) then it is likely to increase the traffic to your location as well. More traffic typically means you can charge higher $/SqFt rent and maintain higher quality tenants. Ultimately, this will mean a more stable and valuable property.

If you are leasing a space at a retail location, higher traffic means more customers and income for your business. You may have to pay a premium rent, but ultimately you are benefiting more from the location.

If there are large corporate establishments or “anchors” in the area such as grocers, fast food chains, and banks, it’s a good indication that the location is strong. These large corporations perform an in-depth analyses and have minimum requirements for each new location they approve (whether it’s franchisee or corporate-owned.) Their locations attract lots of people so being near them will increase your

Traffic Counts: Vehicles Per Day

You may be able to find out the traffic survey data showing you how many vehicles per day pass by on major roads near the property you are considering. This will allow you to compare multiple real estate locations and give you a sense of how busy the shopping center would be. This can also be helpful if you’re analyzing properties in many different parts of the city and you want to find out which area is busiest.

You can often find out area-specific traffic information from the city. If you’re working with a commercial real estate agent, they would be able to help you with this as well through the analytical tools they use. (Email me for recommendations)

A higher traffic space is more desirable and therefore more valuable. It’s likely to get more customers so the rent charged is usually higher. Plus, finding new tenants is easier so vacancy factor would be lower. Since commercial real estate is most typically valued based on its income, high-traffic locations are very likely retain and grow in value over time.

Traffic Signals

Being located at or near traffic signals can be a huge benefit, especially a signalized intersection. Drivers and passengers stopped at red lights tend to look around and observe the area around them. This brings attention and awareness to the businesses located at or near signalized corners.

Being located near a traffic signal indicates that there is high traffic and typically better ingress & egress, meaning that people can more easily enter and exit the premises in their vehicles.

Visibility / Signage

Is the retail location visible to people passing by? Is there good signage to let them know your location and/or tenants exist and open for business? Customers can’t visit the businesses if they don’t know about them. This is why many real estate investors will buy retail spaces and immediately improve the signage, either paying for it themselves or passing on the expense to tenants.

Parking

There must be sufficient parking for all the tenants and customers of those tenants. Some tenants have different peak hours and this should be a consideration, especially if there is no street parking available. If parking is especially difficult, there may be spaces reserved for the businesses or paid parking.

Demographics & Population

Demographic data includes many factors: Population growth, average income level, average education level, renters vs homeowners, ethnicities in the area, industries in the area, etc.

Pay attention to the direction these markers are moving in over time, as they can impact the strength of the tenants and overall value of the property over time. It’s always best to think long term and invest in real estate located in an are that is likely to appreciate over time.

Development in the Area

Pay attention to any recent development in the area, including multifamily buildings. If real estate developers are active in the area it’s a good sign that property values will increase over time. Check for new developments recently constructed or sold, and/or any permits have recently been approved with the city.

Competition

Pay attention to whether there are nearby businesses or tenants offering the same goods and services as those offered by the tenants in the retail property you are considering. If you’re a tenant interested in leasing a space, this should be a major concern. It is not necessarily a dealbreaker, however, you definitely want to be aware of this if there will be heavy competition to the flagship tenant. .

Leases

At the end of the day, the quality and terms of the leases matter most. If you’re considering a purchase of a commercial retail property, you want to analyze the current tenants and leases. Ultimately, the income (or potential income) generated by the property determines its overall value (or potential value).

You may consider what nearby properties are leasing for to see if there is a value add potential. If you are a prospective tenant or business owner looking for a space, you may look for comparable leases nearby to make sure you are able to negotiate a fair rate.

Check out the leasing series on my Youtube channel for more information on commercial real estate leases.

Conclusion

Location is a critical determinant of traffic, stability, and overall value of real estate property. At the end of the day, you could spend money improving or reconstructing the buildings and improvements, but you cannot move the land itself. Spend the time to study the area and become familiar with all the major players in the area. Look at comparable sales and leases to see the potential of your property. When it comes to real estate investing, knowledge is power.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s