Archive for month: February, 2023

With continued growth projections for the retail industry, shopping centers can be a great investment as long as you understand what you are investing in and the risks associated. ICSC defines a shopping center as a group of retail and other commercial establishments that is planned, developed, owned and managed as a single property, typically with on-site parking provided.

Shopping centers come in various combinations of size, concept, tenant purpose, and anchor mix. Mainstream media, Wall Street and the general public don’t have a set classification system to follow because the industry doesn’t have an agreed upon system to categorize shopping centers. Inherently complex and difficult to understand, ICSC has developed a classification table with typical characteristics they are hoping the industry will adopt. We’re not quite sold on this system.

Types of Shopping Centers

Malls

The most identifiable of the various types of shopping centers, typically enclosed buildings with a central corridor and with one shared roof are malls. Key components that help categorize a shopping center a mall:

• 400,000 – 800,000 sq. ft. of commercial space (although there is no actual limit to the size they can be)
• At least 2 anchor tenants (typically national department stores)
• House food courts or full-service restaurants
• Apparel makes up a sizable portion of the general products sold 

The growth of e-commerce has made it difficult for many malls to remain competitive. However, many malls are increasingly relying on fresh approaches to draw customers, such as providing more experience shopping options and including other forms of entertainment, like restaurants and movie theaters.

Neighborhood Centers | Community Centers

Neighborhood Centers typically get thrown into the category of what people refer to as strip malls. A strip mall is a collection of retail stores and other businesses that are designed, built, owned, and operated as a single building with on-site parking. Key components that help categorize a shopping center a Neighborhood or Community Center:

• 30,000 – 400,000 square feet in size
• Have one to two anchor stores
• Provide daily necessities and personal services such as grocery, apparel, drugstores, tailors, dry cleaners, or cell phone stores

Because they often include local “mom-and-pop” businesses with less of an established reputation, community centers —along with neighborhood centers and convenience centers —pose a higher risk for lenders and investors. Having strong anchor tenants can mitigate this risk.

Power Center | Big Box Stores

The defining characteristic of power centers are that they are made primarily of anchor stores. Typically 75% to 90% of available retail space in Power Centers is dedicated to anchor stores. Name brand grocery stores, discount stores, super drugstores, and home improvement stores are examples of typical big box store anchors. Key components that help categorize a shopping center a Power Center or Big Box Store:

• Retail space ranging from 100,000 – 300,000 square feet 
• At least three anchor stores
• Pad sites typically include fast food or other eateries in their parking lot

Other Shopping Centers

Shopping centers that can’t be classified in the previously mentioned shopping center types, are factory outlets, mixed-use retail, fashion centers, and freestanding retail stores.

Contributing Factors to Shopping Center Success

Location

One important factor to consider when evaluating a commercial investment property, particularly in the shopping center sector, is location. The location of any kind of shopping center can greatly impact its potential for success. It’s important to look for properties located in high-traffic areas, with easy access to public transportation and close proximity to major highways, and in a market with a strong and growing population.

Tenant Mix

Another important factor to consider is the tenant mix and the diversity of the tenant mix. A shopping center property with a mix of different types of retailers, such as a grocery store, pharmacy, and clothing store, has a better chance of success than a property with only one type of tenant. The state of the economy and buyer expendable income will directly impact some tenant types more than others.

Market Conditions and Outlook

It’s also important to thoroughly research the current market conditions and the future potential of the area. A property in an area with a strong economy and a positive outlook for future growth is more likely to be a successful investment. For example, since the COVID-19 pandemic, open-air Neighborhood Centers and Power Centers have performed consistently better than indoor shopping Malls. The contactless shopping methods were easier to implement in an outdoor layout and thus made these centers more adaptable and therefore more profitable.  

Lastly, when investing in retail properties, it’s essential to work with a team of commercial real estate professionals who have the experience and expertise to guide you through the process. Sands Investment Group has an expert retail-focused team that can provide valuable advice and guide you to make good investment decisions. Contact Sands Investment Group to learn more.

The property class system categorizes commercial real estate properties making it easier for investors to evaluate the value and risk involved in an investment. Firms and investors use a combination of various factors to determine the class of each property.

Commercial Real Estate Property Class Types

Commercial real estate property classes are meant to function as comparative indicators that help investors identify various business properties within the same market or area. Because commercial properties vary in quality, location and age they can be classified into three main groups: Class A, B, and C.

Factors that Determine Property Class

Investors normally consider these relative metrics for the purpose of comparison with other buildings in the same market or region. Excelling in one category won’t necessarily cause a property to rank in Class A– it is instead a combination of all factors. The determination of a property’s classification is a combination of some or all of these factors. These criteria normally include:

1. Risk & Return
2. Features and Amenities
3. Quality and Condition
4. Location and Accessibility
5. Growth Potential
6. Age
7. Market Perception

The three main property classes present a different level of risk or opportunity for an investor and how it may impact their investment portfolio. As buildings get updates or become dated, they can shift classes. An ideal location will always add value, while a less favorable location may prevent a nice building from being considered Class A.

What’s the Difference Between Each Commercial Property Class?

Class A is the best quality with the least risk, while Class B and C fall below in descending order. The range from premium amenities and quality location to outdated and unfavorable markets creates a grading system to help classify commercial real estate property.

Property Class A

Class A properties are the most prestigious of the three classification types. They are typically new buildings located in central business districts. They are therefore found in heavily populated areas with access to public transportation which makes them more desirable to both an investor and tenant. Due to these premium qualities, rents frequently exceed the market average.

Property Class B

Class B properties are functional, sometimes outdated, buildings that provide average market rents. They are older than Class A buildings, which implies that the investment opportunity presents a higher risk. Class B buildings are not in prime locations but are still in well-populated markets. They typically have average finishes, good quality, and minimal amenities.

Property Class C

Class C properties are the lowest quality classification and are often in disrepair. These commercial properties are typically older than 20 years, in unfavorable areas, and provide below-average rents. They often require more significant capital investment in order to maintain and repair.

Investing in Different Commercial Property Classes

Since there are different risks and rewards associated with each classification, it is important for investors to understand the details of investing in each kind of property. Class A properties provide the most security and capital preservation to investors since they have little to no outstanding issues that could result in further capital investment. Class B and C properties, however, tend to be bought at higher cap rates than Class A properties. For the additional risk that investors take on by investing in a lower-class property, more reward can be earned through the potential growth appreciation of these properties.

Sands Investment Group can help you find the best opportunity for your portfolio in any property class. We are a leading commercial real estate brokerage firm specializing in purchasing and selling investment properties. We provide services to private investors and institutions in the U.S., offering different sub-product type specializations. Contact us today or visit our website to get started.

Convenience Store Outlook

The convenience store industry has withstood fierce competition over the last few years for those looking for convenience and accessibility, and a variety of fresh and healthy products.

Industry revenue is anticipated to grow due to efficiencies in technology, higher income levels, and increase in foot traffic in populated areas. Predicted growth shows the industry rising at an annualized rate of 1.1% to $39B by 2027.

Major Products & Services

Industry operators have increasingly shifted product mixes to include food service products that are more profitable than items such as cigarettes and have focused more on satisfying demand for quick and easy meal options. As a result, industry operators have benefited from consumers’ need for time-efficient and healthy food service locations. The industry’s major products and services are:

• Tobacco products
• Food service
• Packaged beverages
• Candy and snacks
• Beer
• Other

Convenience Store Key External Factors

The industry has grown in popularity over the last 5 years as employment rates have increased. In response to Americans’ growing demand for convenience, industry operators have opened additional stores, expanded into new markets and readily adapted to changing consumer tastes to increase sales. It’s always important to research your market and keep an eye on some of the industries key external factors:

1. Healthy Eating Index: Expected to continue to rise as consumers demand a variety of premium and organic products which increases industry revenue.
2. Percentage of Smokers: While the percentage of smokers is expected to decrease, smokeless tobacco use increases leaving an opportunity in the market.
3. Urban Population: Anticipated to increase, the urban population tends to purchase more frequently, lifting industry revenue.
4. Per Capita Disposable Income: Convenience stores typically charge higher prices for non-essential items in return for accessibility. Per capita disposable income will directly affect the industry.

Owner-Operator Steps to Success

Opening a convenience store, as compared to other commercial properties, allows for freedom to determine profit margin, a natural customer segment, economic stability, and relative ease in getting starting requirements completed. However, opening a convenience store involves more than just registering it with the state. Here’s some tips on how to get started.

1. Create A Comprehensive Business Plan
   This includes researching the costs involved, such as rent or mortgage payments, equipment and inventory costs, and staffing expenses. It is also important to consider ongoing expenses, like utilities, marketing, and insurance. Additionally, you should consider the location when looking for commercial property. Be it a rural neighborhood, a rural transient area, an urban neighborhood, or an urban transient area. You should take your target market into consideration and how you can cater to their needs and preferences. Furthermore, it is crucial to think about pricing strategies and ways to increase profitability.
2. Establish A Legal Entity
   This can be a sole proprietorship, partnership, limited liability company (LLC), or corporation. Setting up a legal entity provides protection against personal liability in case your convenience store is sued. You can form an LLC on your own and only pay minimal state LLC costs, or you can hire one of the best LLC services for a small additional fee.
3. Register For Taxes
   Before you can establish your convenience store, you must register for state and federal taxes. This includes completing an EIN application on the IRS website. The EIN, Employee Identification Number, is assigned by the IRS used to identify your business and your tax account.
4. Open A Dedicated Business Bank Account And Business Credit Card
   This is essential for personal asset protection. It is also crucial to set up business accounting and keep accurate and detailed records of all expenses and income. This will help you understand the financial performance of your business and simplify your annual tax filing.
5. Obtain The Necessary Permits And Licenses
   You risk paying expensive penalties or possibly having your store shut down if you don’t obtain the required licenses and permits. This includes a tobacco vendor’s license, which must be renewed annually, a liquor license, and a lottery retailer’s license. You could also acquire a resale certificate, which enables businesses to buy products with the intention of reselling them, without having to pay sales tax. If you sell food, you will need licensing from a local health department. It is also essential to acquire music licensing and a certificate of occupancy.
6. Get Business Insurance
   Business insurance is crucial to protect your business in case of a loss. There are several types of insurance policies created for different types of businesses that face different risks. If you are uncertain about the types of risks that your business may encounter, begin with general liability insurance. Since small businesses typically require this kind of coverage, it’s an ideal place to start.

Conclusion

Starting a convenience store as a commercial real estate investment operator can be a consuming task, but with proper planning and execution, it can be a profitable and successful venture. There are also many options and opportunities to invest in a convenience store without getting your hands dirty. Sands Investment Group has a specialized team built across the country with expertise in convenience store commercial real estate investments. Check out our c-store team, convenience store listings, and learn more by reaching out to a SIG team members today.

The 2023 outlook suggests that there may be challenges ahead for the commercial real estate industry, but this kind of news is nothing new. The future of retail and office space is uncertain, and supply chain issues and high inflation persist. However, there are also bright spots in the forecast, such as the continued success of multifamily properties and the growing demand for industrial commercial real estate.

Major Influencing Factors on Industrial Commercial Real Estate

Macroeconomics

Macroeconomic factors include geopolitical issues, high inflation, and rising interest rates, which may impact commercial real estate in 2023. Inflation in the U.S. reached a 40-year high of 7.75% in October 2022, and interest rates are expected to continue to increase, which could negatively impact commercial real estate owners. Geopolitical issues such as the war in Ukraine and resulting sanctions have had major global economic implications such as supply chain issues driving up the cost of food, shelter and energy. These factors may lead to a mild to moderate recession in 2023.

Supply and Demand

Supply in the industrial sector will affect demand. According to Cushman & Wakefield, a record 148.2 million square feet of space was developed and made available by logistics developers in the third quarter of 2021. That figure is around 72% more than the quarterly average of the last five years. This record number of new warehouse supplies entering the market and growing recession worries limit demand. 

Growth in E-Commerce

The e-commerce warehouse industry has an extremely hopeful future. The retail scene has changed significantly over the past several years as a result of the COVID pandemic and the continuous digitalization of modern life, making e-commerce a crucial component of the worldwide retail business.  In fact, global retail e-commerce is expected to rise to $7.14 trillion by 2025 from $3.23 trillion in 2019, according to eMarketer. This is expected to boost the market share from 13.9% to 22.3% during the predicted period, creating a lot of room for growth and making it a promising sector for an industrial commercial real estate investment. 

Investment Strategies to Consider

In light of the potential for a recession in 2023, it’s important for commercial real estate professionals to be strategic in how they approach their business. Some strategies we think would be wise to consider:

1. Diversify your portfolio: In a recession, asset classes will be affected differently. By diversifying your portfolio, you can minimize the impact of a downturn in one particular market therefore mitigating risk and/or losses. 
2. Focus on multifamily properties: Multifamily properties have been performing well and are likely to continue to do so even in a recession. Investing in or owning multifamily properties could provide a stable source of income during a recession.
3. Develop affordable housing: Demand for affordable and workforce housing far outweighs the supply. This is an opportunity for commercial investment companies to invest in the development of this type of housing, which is likely to be in high demand even in a recession. This could include modular construction, adaptive reuse of buildings, mixed-income properties, and unique capital solutions.
4. Be strategic with financing: During a recession, credit may be tighter and it may be more difficult to secure financing. Be strategic in how you use your financing and consider alternative sources of funding such as private equity or crowdfunding.
5. Be flexible: In a recession, the market may change rapidly. Be prepared to adjust your strategy as needed to adapt to the changing market conditions. For example, if the office market is struggling, consider repurposing the space for industrial commercial real estate or multifamily use.
6. Have a strong risk management strategy: A recession can bring unpredictable challenges to your business, it’s important to have a strong risk management strategy in place to mitigate potential losses. This can include things like hedging against currency fluctuations, insuring against property damage or loss, and creating contingency plans for potential market downturns. 

Conclusion

Investors need to stay updated on what’s happening in the industrial commercial real estate market before investing their money. Sands Investment Group has a team of dedicated professionals, ready to maximize your investment portfolio. Contact our advisors to learn more today.