Economics of retail real estate improving

After several years during which multifamily real estate was a popular investment as increased demand drove up the cost of available properties, it’s time for a change in real estate investment.

Today the commercial real estate industry is abuzz with whispers of the resurgence of retail. The primary query: Is retail the next big thing?

Our answer: It is a big thing — but not the only thing.

From an investment standpoint, retail capacity rates are beginning to look attractive for investors focused on cash flow, and the opportunity for rent growth is increasing. In short, the economics of retail are improving.

Many retail properties in the current market are in a prime position for acquisition. During the recession, retail rents, which had been written at higher rates, were lowered so owners could maintain occupancy levels. This presents an opportunity for investors to acquire properties now and steadily increase rents to achieve higher cash flow.

What does this mean for advisers?

For those who are aware of this movement, it means there is now an opportunity to offer their clients some diversification among real estate property types, with retail and multifamily rounding out a more structured portfolio. By including retail, advisers will enhance their clients’ overall portfolio returns and achieve higher yields in the short run, and long-term capital gains.

As the focus turns to retail, a new, product-specific question will arise: Which retail acquisitions make the best investments?

The answer is potentially surprising: partially stabilized assets.

The strongest investments in today’s retail market are neighborhood shopping centers with a stable tenant base and some vacancy that can be leased in a relatively short period of time with professional, qualified management, and leasing expertise and contacts.

In particular, shopping centers with a strong combination of retailers including beauty, service and food can be a focus. These services are not threatened by Internet sales and are always in demand from consumers. As a result, these retail investments provide steady cash flow and an opportunity to sustain and add value over time.

It is important to note, however, that even amid the growing opportunity for increased value and strong yields, retail investments continue to be potentially volatile, and investors should tread carefully when selecting properties in which to invest.

For individual investors, the process of identifying, vetting and acquiring the right retail centers may seem unapproachable, especially with so many heavy-hitting commercial investors already in play.

To combat this competition, advisers should steer their clients toward opportunities that allow them to take part in retail ownership while partnering with an experienced operator.

Overall, savvy investors should be looking toward retail as the next wave of commercial investment. Advisers who are in the know will educate themselves about the opportunities in the market and pursue them now, as potential yields are quite strong.

Bill Passo is the founder and chief executive of Passco Cos.

Related Topics: Investment Strategies