If you’ve been investing in commercial properties for a while, you’ve probably noticed a rising vacancy rate lately. This is due in part to rising rents and lower consumer spending. However, it’s not indicative of the entire market. There are always opportunities, even when the market as a whole seems to be declining. The big opportunity now is retail.
Commercial properties have a high return, but you have to choose the right type of investment. Depending on the market, some property types do better than others. Currently, retail properties are ideal.
Why is retail the ideal commercial investment now?
Although retail doesn’t automatically outperform other property types, it happens to be performing well right now (if you get the location right). Although major corporations are closing numerous locations, retail vacancies are being filled by smaller companies, including local businesses.
It’s true that retail space rent has risen by around 6.3% since 2020, and that has driven a lot of businesses to move or shut down. However, it’s also opening up spaces for local businesses that couldn’t rent a good location before. Those businesses are now able to rent optimal locations in communities they serve. There is still a demand for all kinds of retail services, but as everyone knows, it’s all about location.
For example, when big corporations shut down in small communities, those retail spaces are usually taken by local businesses who have had to rent space further away. When local space frees up, they can move their store closer to their market. And if the demand is high enough, their profits will make up for the higher cost of rent. This is common in cities with an exceptional focus on sustainability and organic living. They actually can’t wait for the big corporations to leave so more local, small businesses can open shop.
Just remember that no matter how good the commercial real estate market is, you need a property management team to be profitable. Most investors who start out thinking they can do it on their own quickly realize it’s just not feasible.
Small cities hold great investment opportunities
During the pandemic, many people moved out of urban areas and into the suburbs. Thanks to the surge in remote work, this was easy. Now that small towns have higher populations, they need the retail stores to support that growth. However, there’s a downside that can be used to your investing advantage.
It’s common for suburban areas to become traffic bottlenecks for miles to the nearest big town after they see rapid population growth. This is caused by a lack of retail stores to meet their shopping and employment needs. When you have a large portion of a city that needs to drive out of town to have their needs met, the result is somewhat chaotic.
Investing in suburban commercial real estate can be a profitable move right now, including new developments. These cities need to grow, and will be expanding the number of retail buildings out of necessity.
Businesses are choosing suburban locations
When you own commercial retail property in the suburbs, your properties will be in demand because businesses are specifically choosing to open suburban locations. For example, the restaurant chain Sweetgreen now operates half of its locations in suburban areas, but it’s not just restaurants that are thriving in suburbia.
According to The Wall Street Journal, suburban landlords saw a strong demand from retailers despite the high inflation and rising interest rates. Some shopping centers saw record-high leasing in the first quarter of 2023, while others say their entire portfolio is over 98% leased.
So, other than food, what stores are seeing success? The most profitable retail economies right now are high-end malls and dollar stores. High-income earners are spending more, while low-income earners are spending less. Luxury retailers are opening locations in suburban areas, and so are dollar stores. They’re both seeing profits. In fact, Macerich, the real estate investment trust (REIT) that owns high-end malls in Arizona and Virginia, experienced the highest leasing volume in 2022 since the 2008 financial crisis and is on track to do even better in 2023.
Suburban commercial properties are profitable
If you’re looking to acquire more commercial properties, take your search to the suburbs where profitability is currently high. Those who bought homes in small towns during the pandemic aren’t going to move again anytime soon, so consider investing in retail spaces before it’s too late.
