What Are The Best Practices For Investing In Commercial Retail?

The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:

Best practices for investing in commercial real estate start with paying attention to your own due diligence. It might be tempting to listen to success stories, but how much credence you should place in them becoming your own experience is negligible. Pay close attention to the market, the area, and the property you’re looking to invest in. If you’re not a professional yet in investing in commercial real estate, one of the best things you can do is learn from working with a partner, mentor, or sponsor with a proven track record. 

Richard Wilson: What are some best practices for investing in retail commercial real estate? 

S.L. Van Der Zanden: So, there’s a lot of them! Due diligence you just can’t do enough of. I mean, it’s hard work, so it’s easy to slough off on it – where you talk to a few people, and they tell you a great story, and you just want to believe it, but you really have to do your own analysis on both financially and with the market. The demographics of that area, who’s in that market and who isn’t, that’s called a void analysis, to figure out where a market may have too much automotive supplies, and not enough computer vendors or whatever. It’s important to look at that relative to the property tenant base you’re buying, not that they can’t be replaced, but it’s a good clue on how your tenants are going to fare in the market from a financial perspective. 

In retail, basically they have a list of fundamentals. There’s what we call VPD, or vehicles per day how many cars pass in front of the property, access, can you get into it from both directions or is there a median in the road, visibility, is it on a hard corner, which is great, but more expensive. Other issues could be if there’s trees or landscaping along the frontage, which a lot of municipalities like to do to make things green, but, meanwhile, the tenant is behind them, no one knows they’re there, and they’re suffering – don’t pay a lot of sales tax that way! 

Lastly, out lots can stand in the way, too. It’s a balancing act to put out lots there because they draw customers in, but you still need the visibility to the tenants in the strip center. What else? Assume you’re not buying this direct and you’re working with the sponsor, you want to make sure that the offering memorandum is thorough, hasn’t deliberately left things out, and check it out – make sure it makes sense. If you follow those things, you’re going to be in great shape. Lastly I would say is if you’re doing this and you’re not a pro already, you need a partner. Whether that’s a mentor, or a partner-partner, or a sponsor, someone who has a track record, and who has history that you can rely on. Otherwise, you’re shooting in the dark. 

Richard: Right, right.