Investing in retail real estate

For smaller investors, the neighbourhood strip centre is the safest route: the returns are generally good and the risks are low

By
Western Investor
June 23, 2017





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Too often you hear a phrase that is commonly used and you have a rough idea what it means without fully grasping its proper definition. For many, commercial real estate may be one that is widely talked about but not always understood.

In fact, it is an umbrella term that covers many categories of real estate. So let’s move away from the headlines and look at how commercial retail real estate can be part of your investment strategy.

To do this, we will break retail down to four different categories.

Regional mall: At the top of the pyramid is the regional retail mall, often sprawling in size. Think of major landmarks, like the Toronto Eaton Centre or West Edmonton Mall.

These are tourist attractions in themselves that have high value and often operate as a large entity or corporation.

While Canada has some of the most commercially successful malls in the global market, growth in this area has been curtailed by land development limitations. Since 1989, only three major shopping malls have been built in Canada: Vaughan Mills in Toronto, CrossIron Mills in Calgary and Tsawwassen Mills near Vancouver, which opened in 2016.

Power centres: Power centres have taken hold in the Canadian market since the late 1980s in the form of unenclosed stand-alone “big box” stores such as Staples and Walmart. Despite economic challenges, tenancy increased from 8,627 in 2006 to 12,086 in 2010 – a rise of just over 40 per cent.

Today, we’re noticing a tremendous upsurge in power centres. The number of locations in Ontario have nearly doubled and across the country we are seeing a widening of the services available (from banking to fashion).

Community malls: Unlike regional malls, community malls are losing significant ground in the retail landscape and are struggling to keep up.

Analysts still believe there is a market for Tier 2 malls if there is a commitment to redesign or if the property is being sold for other purposes.

Neighbourhood retail: Small retail areas anchored in well-established residential areas and mature communities make up what is known as neighbourhood retail, or strip malls. Here, you often find local food stores, coffee shops and hair salons. And that’s exactly why this type of retail tends to perform better than others in the long term – it’s based on services and products consumers will still purchase even when there is economic downturn.

For family trusts and other investors, neighbourhood retail is an effective way to diversify an investment portfolio. The returns are good and the risks are relatively low.

Last year, the national vacancy rate was about 4.8 per cent. In comparison, neighbourhood retail areas were averaging about 2.6 per cent vacancy rates.

Similarly, overall sales tend to stay steady during economic bumps, catering to the local neighbourhood needs. The more mature the neighbourhood, the more likely there will be low vacancy rates and increasing growth.

 

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Previous: Sexy industrial 


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