The retail landscape has drastically transformed after the past two years of pandemic-related shutdowns, safety requirements, supply chain headaches, and employment shortages. If you are considering investing in real estate this year, there are pros and cons before jumping into this real estate market.
Buying a Retail Space in 2022
As an entrepreneur, investing in any commercial property type comes with inherent risk. Still, additional considerations are necessary for those interested in the retail space, whether you plan to rent or occupy your new building. Below are the essential pros and cons to keep in mind in a post-COVID-19 real estate market:
Pro: Retail Property Offers Increased Cash-Flow Opportunities
You likely are considering the profitability of owning retail space and the ongoing income it will provide. Commercial property returns are typically better than residential opportunities, especially if the building already has tenants. This provides instant cash flow to help you get started.
Con: Heightened Liability Risk
One clear disadvantage of investing in retail space in 2022 is the increased liabilities you take on with the purchase. For example, if your tenant opens a gym in your new strip mall, a significant number of visitors will come to your property. This means a higher chance of personal injuries and damage to the grounds and building itself.
Common liabilities you might face could include:
● Vandalism and break-ins
● Fire and water damage
● Structural damage caused by visitors and tenants
● Slip, trip, and fall injuries
● Third-party negligence suits against your company
This is just the tip of the iceberg regarding the perils you’ll face as a retail space owner in 2022. First, before finalizing your investment, weigh the risks associated with your tenants, location, and property. Then, contact a knowledgeable insurer about business property insurance prices for your new acquisition.
Pro: You Control Who Occupies Your Buildings
One of the disadvantages of residential property management is the numerous governmental restrictions regarding your lease applications and the terms you can include in the rental agreement. While the commercial property industry has similar regulations, you have more freedom regarding lease provisions. Plus, you can request additional documentation from businesses when vetting their application to rent your retail space.
Con: Higher Upfront Investment
As a commercial real estate investor, you know these properties cost more than a house. But did you know you will have to pay a more significant down payment upfront because this industry typically has a lower loan-to-value ratio? Upfront costs for retail space investment are substantial, so make sure to plan for all the closing costs, insurance premiums, and related fees.
Pro: Commercial Tenants are Less Likely to Cause Issues
One of the advantages of renting retail space versus a residence is that you’re dealing with businesses, not individuals. This dynamic changes the nature of your tenant-landlord relationship in several ways, including:
● The lease has higher credit backing, including personal guarantees from the company owners and partners.
● Nuisance complaints are minimal since retail businesses follow banking hours, though food and bar establishments may be the exception.
● Property damage will also be minimal since the condition of their building directly reflects upon their brand.
While it’s impossible to avoid poor commercial tenants all the time, they are usually far and few between.
Con: Economic Instability Can Devastate Your Bottom Line
Retail businesses are regularly impacted by economic instability and downturns. For example, when the economic shutdown occurred in 2021, thousands of companies had to shutter their doors, slash service offerings, lay off employees, and deal with extreme disruption to their operations as a whole. However, as the world economy slowly pulls out of the slump caused by the pandemic, real estate investment has begun to rebound as the retail market improves.
However, remember that even supply chain issues, inflation, and fuel costs can dramatically impact your tenants and their ability to remain profitable. As a result, they may need to downsize and look for more affordable spaces for lease when financial uncertainty strikes.
Pro: Rent Increases Won’t Affect Your Bottom Line if You Occupy the Space
If you currently don’t have an office to conduct your property management duties, you may consider being an owner-occupier. This term describes commercial property owners who also occupy part of their real estate to conduct business. The ability to avoid leasing fees and have a professional location to meet prospective tenants is a clear benefit of owning a retail space in 2022.
Con: Once You’re In, It’s Hard to Get Out
One of the biggest regrets some retail investors have in 2022 is not investing in a larger space or making a purchase that proves too expensive to maintain later, sometimes, what appears to be a growing retail market suddenly contracts–creating a slower than expected return and growth that could force you to sell at a loss.
Conversely, it’s possible to underestimate the level of demand in your region, and you need a bigger space. -This could mean missing out on potential growth if you can’t secure enough financing to build upon your current structure or purchase additional locations.