I hate shopping centers! I acquired ten for United Dominion Realty (“UDR”).  We applied our philosophy of “clean, safe, cheap”.  We removed anything not bolted to the buildings.  We added sufficient lighting to do surgery at midnight. We kept the rents below market. And then we waited.  And waited some more.  

Leasing occurred, when prospective tenants were finally ready to move.  But only after significant tenant improvement dollars were provided.  And some free rent to get their business up and running.  They did, eventually, pay their rent.  

Am I exaggerating? Maybe just a little.  I just prefer tenants where they are fungible, as with apartments, hotels, self-storage and some flex properties.  Retail tenants demand too much for providing too little to make them attractive for my investment money.  Then again, I may just be stuck in my ways!

CUT TO THE CHASE

Retail centers can be a great investment to make you rich…or make you regret you invested in real estate!  There are sign posts to observe in your due diligence process which may help you determine whether this prospective investment makes sense.

IF IT WALKS LIKE A DUCK, SOUNDS LIKE A DUCK…

1. TENANTS PARK WHERE? Visit the center near closing time. Have the tenants parked away from the buildings, allowing spaces for customers?  If they park close to their store, maybe they feel it is unsafe to walk a long distance to their vehicle.
2. TIMELY GOODS.   Pull from the shelves at random items from different parts of a grocery store. If the goods are approaching their “use by date”, insufficient turn may be due to low customer traffic.  This tenant is not going to survive.
3. SUPPLIERS LOVE TO TALK.  Stop the delivery driver and ask them how busy they are at this store.  If you are nice, they will give you better information they you will get from the seller.   And since they supply many of the competitors, they may also give you their analysis of what works in this market.  Ditto talking with police, fire and staff of elected officials (the politicians will tell you nothing meaningful; their staff, on the other hand, will want to help).
4. COORDINATION. Do all the stores open and close at the same time? It helps to pull customers to a center when everything you want is available all the time. Are they all open on the weekend?  Do the ones which close do so for religious reasons, or do they tell you that the traffic drops significantly on weekends? Most retail stores do not survive open just during the week.
5. CARS TALK.  How old and in what condition are the automobiles of the customers? How much of the parking is commuters leaving their cars to travel some other way to work? Is the parking lot only packed at unusual times (e.g., when bingo is up and running)?
6. PERCEPTION.  Ask someone a mile or two away where to get a haircut/sandwich/oil change (stuff at the subject retail center).  If they all send you somewhere else, either the public does not know your center exists, OR they chose to have nothing to do with the tenants at the center.
7. ACCESS. Is this property on the right side of the road to capture drivers heading home from work (or whenever they are more likely to stop to shop)?  Is there a traffic light allowing for a turn, or does one have to risk their life to cut across traffic?

BOTTOM LINE

A retail center must fit within the community surrounding it. If the community is safe with growing incomes, your center has a good chance to attract quality tenants which pay their rent on time.  You may improve the physical appearance of a center (as we did at UDR), but the context of the community in which it is located will determine the tenants you will be able to attract. 

For questions or further discussion on retail due diligence and shopping center analysis, contact rick@chesslawfirm.com.