Purchasing a retail or office property can be especially tricky for an inexperienced investor, but it can also be a profitable niche. What is important is to understand your potential tenants, what they might need and what they will pay.
Stay up on the news
If you’re hoping to invest in retail or office space, it’s important to stay on top of economic and industry trends. Use reports such as consulting firm Deloitte’s Retail Industry Outlook or JLL’s 2019 Office Outlook. These and other reports can help you decide not only if this type of asset class is for you, but also know how to stay on top of the trends that will allow you to attract and keep tenants and therefore maximize your ROI.
These properties are price-sensitive and affected by recessions. That means if you have a small retail property rented by a boutique and the economy suffers a downturn, that boutique may not be able to sell its goods and therefore, may not be able to make its rent.
Network, network, network
When evaluating a retail or office property, you’ll want to talk to as many prospective tenants, business owners and commercial brokers as possible.
Landlords often connect with commercial retail and office tenants by networking, either through experienced brokers or through professional organizations. Understanding which companies and businesses are looking for space, where, and what kind, can help a real estate investor better evaluate properties which are in demand, and which are not.
Determine a reasonable lease to expect
Determining who your likely tenant is and the type of lease they and the market can bear is a big factor when evaluating a retail or office property for purchase. The type of lease and work required to fit the property to a desirable tenant could make or break your deal.
Unlike residential real estate, commercial leases can be complex and highly negotiable.
Sometimes, buildout is required for a specific tenant. Tenants and landlords could share the cost of a buildout, or a tenant could pay for it all in exchange for free rent during the construction period, or a landlord could pay for it in exchange for higher rent or other terms. The possibilities are endless, and that’s part of the reason an experienced commercial real estate broker is vital to help you through the process.
Retail and office leases are often structured as triple net, which means the tenant pays not only a base rent but also the utilities, property taxes, and the owner’s property insurance. This isn’t always the case with small, boutique, or shared properties. In some cases, it may be more appropriate to do a modified gross lease, which means the tenant may pay base rent, utilities, and property taxes, but not, for example, maintenance.
All of these terms and nuances are highly market-driven, so it is worth having a conversation with a commercial leasing and sales broker in order to know what to expect.
Look at the zoning and land use
Pay attention to your potential office or retail property’s zoning and use, which is important when it comes to either widening or narrowing your potential tenant pool. Your retail or office space may allow a jewelry store, but not a pawn shop; a pet store, but not a convenience store. It’s important to know what is allowed and disallowed, because changing the use later may require a special exception that is difficult to get.
If you plan to change the building’s use or make substantial improvements, you may kick new building codes into effect, which could include costly items like fire sprinklers and elevators, depending on the size and scope of your project. These are items you’ll want to discuss with a potential tenant or build into your scope or budget ahead of time, if you decide it’s worth it.