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Retail Real Estate: Industry Introduction

This is the first in a multi-part series that will focus on the growth, investment, and M&A trends in the retail real estate industry, a member of the commercial real estate sector.

Industry Introduction

The retail real estate industry is a category within the commercial real estate sector. While the commercial sector encompasses properties, including buildings and land, that are used to generate profits the retail industry is more specific. Retail real estate consists of establishments that build and develop shopping and entertainment properties. Many people have found themselves in such a property as this category includes shopping malls, clothing shops, florists, and many more. The retail sector provides services that include renting, leasing, managing, buying and selling retail real estate.

While every investor has different needs a few benefits to investing in retail real estate are discussed below.

Longer Leases
Investors and property managers who participate in the multifamily industry may find themselves dealing with lease renewals on an annual basis. Retail real estate leases are typically longer at around 5 years.

Lower Maintenance
While every property has expenses, the owners of retail space can find themselves in an advantageous position when compared to other property owners. In the retail space the tenant (shop owner) typically will pay for utilities, some maintenance, and other agreed upon expenses.

It is always prudent to weigh the pros with the cons when contemplating an investment. Retail real estate comes with its own unique challenges such as sensitivity to the economic cycle and the difficulty in moving a building should residents start to move away from a specific location.

Main Activities

The primary activities of the retail real estate industry include:

    • Leasing – A professional leasing agent helps owners and retailers in leasing property. The agent may perform various tasks such as market research, conducting site tours, creating the lease plan, and aid in negotiating the final lease.

 

    • Capital & Investments – This segment focuses on debt and equity in the real estate world. Professionals help clients develop a strategy and help them meet return requirements.

 

    • Appraisal – The appraiser is usually engaged when an objective opinion is needed. They may aid in litigation, financing, or determining a fair value in an M&A transaction.

 

    • Development – Developers manage costs and timelines while overseeing construction and financing functions.

 

    • Property Management – Professionals in this role act as caretakers for the property. This role is responsible for maintenance, collections, repairs and budgeting. This role will work directly with tenants.

 

    • Asset Management – While the property manager oversees the property, the asset manager will manage the acquisition of the asset, the utilization and ultimately the disposition.

 

  • Retailer – The driving force behind the entire industry, retailers own or operate income-producing and consumer facing establishments.

 

Similar Industries

Real Estate Sales & Brokerage in the USA

Operators in this industry primarily act as intermediaries during various real estate transactions including buying, selling and renting real estate. Brokers may specialize and focus on one industry. Each broker is required to complete certification exams and register in the state(s) in which they do business.

Office

From single-tenant properties to small office buildings and large downtown skyscrapers this category focuses on the renting, leasing, and buying of property where people work.

Industrial

This category could include “big box” properties, warehouses and other very large properties. A key characteristic of this category includes the height of the building. The number and size of docks may also be considered when classifying this type of property.

Residential

While not all residential properties may fall directly under the commercial real estate umbrella they are certainly a member of the real estate sector. Apartments and multifamily buildings could be considered commercial, while single family homes would most likely be categorized as residential real estate.

Others
Other properties that fall under the commercial real estate umbrella include self-storage property, medical buildings, and leisure facilities such as hotels.

REITs

REITs invest in and manage various types of property including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels.

Outlook

Retail Real Estate is the second largest by market in the commercial real estate sector with approximately 25.2% market share. The retail deal volume that has occurred throughout 2017 is around $60 billion, which is the third largest behind apartment ($110B) and hotel ($120B).

[1]
[2]

Some industry participants do express concern for the retail industry. The concern was focused on the growing trend of consumers making purchases online from e-commerce platforms such as Amazon. Participants in a survey by National Real Estate Investor (NREI) noted that lenders may be more strict on retail in the future[3]. Participants in the survey also commented that the current structure of leases, particularly long-term leases, posed an issue for the industry.

Carlos (Charlie) Izaguirre contributed to this report.

[1]Retrieved from https://www.ibisworld.com/

[2]Retrieved from https://www.prnewswire.com/news-releases/commercial-real-estate-deal-volume-edges-down-in-q4-2017-300605191.html

[3]Retail Real Estate Trends 2017, Part 1: Retail Sentiment Takes a Turn National Real Estate Investor, http://www.nreionline.com/retail-cre-market-study/retail-real-estate-trends-2017-part-1-retail-sentiment-takes-turn (last visited Apr 4, 2018)

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
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