Tips and Advice for Investors Looking to Purchase a Shopping Center Near Them
Investing in shopping plazas is one of the most lucrative areas of the commercial real estate business. Owning a shopping center is a highly profitable enterprise – provided that you invest the necessary time and effort in the selection process when purchasing the property and take a proactive approach to property management once you obtain it.
As a collection of multiple retail stores and service providers (owned individually), shopping centers offer customers the opportunity to search for goods and items under the same roof. Shoppers can enjoy a variety of boutiques, restaurants, cafes, food shops, and entertaining facilities without leaving the complex. In 2021, the value of the global shopping centers market size was at $5331 billion, with the prospect of growing to $8720.15 billion by 2030. The COVID-19 pandemic lockdowns caused shopping centers to close, briefly affecting growth projections. In 2022 (due to mass vaccination and other factors), the market growth trend was on the rise again.
In this article, readers can learn more about the tips for buying a shopping plaza, the benefits of owning a shopping center, and the evaluation methods for purchasing it.
Tips for Buying a Shopping Plaza
Purchasing a shopping center requires investors to consider multiple factors influencing how much profit they can yield from their investment. The profitability depends on several components, such as location, tenant mix, condition of the property, and financing.
Location. The location is the number one factor determining the profitability of commercial real estate. A shopping plaza in a densely populated urban area with good traffic infrastructure and a vast parking space will almost always generate high profits for the owners. In addition, investors must consider the surrounding business network (warehouses, delivery companies, etc.). All these factors contribute to the positive rating of the shopping plaza, attracting high-quality tenants.
Tenant mix. A shopping center is a commercial real property comprising multiple individually operated retail stores paying the rent to the shopping center owner. The rent-based income depends on the diversity and quality of tenants. Owners should seek high-quality tenants interested in long-term leases. Because shopping centers must offer a wide variety of content to the customers, the key to a highly profitable shopping plaza business is a diverse tenant mix.
Condition of the property. Never forget visiting a shopping mall should be a unique experience for customers. Most people go to shopping centers to spend a couple of hours relaxing, shopping, and having a good time. Therefore, shopping plazas should be high-quality properties, offering the best possible customer experience. Think about air conditioning, light effects, safety, and other aspects of comfortable accommodation. Visitors must feel every inch of the property (restrooms, play areas for children, restaurants, etc.) are suited for their pleasure and entertainment.
Financing. Shopping centers have two principal income sources: lease income and sales proceeds. Long-term lease tenants pay the rent, producing a steady income stream for the owner. In addition to the rent, tenants also participate in the shopping center’s operating expenses. However, the most significant investment return results from the sales proceeds – the price the owner gets when they sell the shopping plaza. Hence, investors generate income from the rent while owning the property and the sales price once they sell it.
Benefits of Owning a Shopping Plaza
Investing in a shopping plaza brings multiple benefits. The most common are the following:
Rental income. Long-term tenants produce a steady income stream, enabling investors to allocate funds to other areas of their enterprise. The key to maintaining rental income is attracting high-quality tenants by offering them a market advantage over their competition. The way to do that is to make your shopping plaza easy-accessible, content-rich, and adjustable to the latest trends in retail shopping (omnichannel sales and delivery, social commerce, etc.).
Appreciation. Commercial real estate properties are known for their appreciation potential. Once they acquire it, shopping plaza owners keep investing in the property to make it more attractive for the tenants. More high-quality, long-term tenants mean the property value increases over time.
Tax benefits. Another benefit of owning a shopping center is tax deductions. Tax liability reduces by writing off the property’s operating expenses against the income. The owner can also reap benefits by deferring capital gains taxes using the 1031 Exchange real estate transaction.
How to Evaluate a Shopping Plaza for Sale?
Before purchasing a shopping center, investors should take all necessary precautions to protect themselves from potential financial losses.
Conduct financial analysis. The key to succeeding in the commercial real estate business is understanding the potential financial performance of the property you intend to purchase. Buying a shopping center includes analyzing the location, population density and demographic structure, traffic infrastructure, and other factors determining its profitability.
Perform due diligence. Before you sign a contract purchasing a shopping plaza, do research and verify available information about the property. Proper due diligence includes property inspection, tenant rental agreements confirmation, Phase I environmental assessment, and the rent rollover analysis. The goal is to identify potential safety and environmental hazards and lease deficiencies.
Work with a real estate professional. Purchasing a shopping center is an investment requiring vast funds. Sometimes it includes using credits and other funding mechanisms. Do not make any high-value commercial real estate investment without consultation with professionals. Real estate agents can help you with every step along the way – by giving you invaluable tips for buying a shopping plaza, analyzing market conditions, and pointing to potential downsides.
Reach Out to Dean Commercial Real Estate
The commercial real estate market is rising, despite recent public health-related setbacks. Shopping centers are adjusting to the new retail industry trends that involve social media channels and home delivery.
When purchasing a shopping plaza, the key is to conduct thorough research and due diligence. At Dean Commercial Real Estate, we are committed to providing you with comprehensive counseling and market analysis.
