How Retail Investors Are Vetting Potential Properties

There is still plenty of opportunity in the retail market, but there is also higher risk. To hedge against the downside, retail investors are carefully analyzing potential opportunities, reviewing a specific set of predetermined criteria before making any purchases. This has become the norm for retail investors in today’s unique market.

“Consumer confidence, job growth and the stock market are all doing well, and interest rates remain low for the foreseeable future,” Carlos Lopez, EVP at Hanley Investment Group, tells GlobeSt.com. “However, if one were to look at these aforementioned four economic indicators, one might think there would be a high velocity of retail transactions but that is just not the case. Buyers, investors and lenders involved in the retail sector are more carefully examining the real estate fundamentals.”

The investment retail checklist starts with an analysis of the location, including corner location, traffic counts, demographics, proximity to transit, nearby amenities and co-tenants. Next, investors will determine future rent growth, tenant sales performance and tenant stability. “If the property has all of these real estate fundamentals—if all the boxes are checked—you have good real estate,” says Lopez.

While this checklist determines the quality of the real estate, properties that don’t meet the standards could be profitable. “If any of these fundamentals cannot be checked—such as the property has a less desirable location, underperforming tenant sales, poor or non-existent tenant credit, etc.—the property may be difficult to move and/or a pricing or value adjustment may be necessary to sell the property,” says Lopez.

Of course, properties that don’t check the boxes will have less attention and investor interest than those that do. Retail has become a bifurcated market with high competition on worthy properties and little interest in low-quality assets. “It is the top-tier locations with strong real estate fundamentals that are in high demand—those with lease rates that are in line with or below current market lease rates and tenants that are performing well or have a high historic performance of sales,” says Lopez. “I feel that this scrutiny of retail and the demand for the best real estate fundamentals in order to transact is the new normal and sellers will need to adjust their pricing expectations if their property doesn’t check all the boxes.”