It is no secret that over the last two years, the retail investment market has been making a comeback from the pandemic years, but we’re happy to say that the retail market is back. Yet over 50% of all commercial real estate transactions are Multifamily. When considering Retail or Multifamily, it is crucial to consider your strengths as a landlord. Each asset type will have more opportunities or risks depending on your skill set. So what are the risks and opportunities for both Multifamily and Retail? How do these asset types compare to one another? Should you consider a retail investment next or stick to Multifamily?
1.) The Difference – Retail Tenants VS Multifamily Tenants
When you’re the Landlord of any property, you are going into business with your tenants, whether you realize it or not. When looking at both Multifamily and Retail, the people you’re going into business with are much different. One is a person who lives in an apartment. The extent of your due diligence is maybe an income check to ensure they’ll pay rent on time. For Retail, however, you are working with a business owner. The due diligence process for finding tenants becomes more in-depth. You have to look at the business model and revenue and decide, “how likely is it that this business will succeed?”. The reason that it’s more important to take an in-depth look at retail tenants, too, if a business goes under or can no longer pay rent, stay in your building. You are losing a large chunk of the net operating income, and you will have to spend time and money to acquire another tenant to fill the space that is now open. With Multifamily, everyone needs a place to live, and turnovers can be relatively quick and minimally affect cash flow and NOI.
2.) Adding Value
There are a couple of ways to add value to retail assets. You can add direct physical value to the property through renovation, buildout, improved signage, curb appeal, etc. However, the best way to add value to Retail (when possible) is by leasing or bringing in a higher-value tenant. If you have a vacant space in your Retail building, depending if you bought it that way. There may be a large void in your cash flow. When you add a retail tenant and sign them to a multiple-year lease, you can add hundreds of thousands of dollars to your property, depending on the length of the lease. Another way to add value through leasing is by renewing or extending current leases or bringing in higher-value tenants. With Multifamily properties, almost everything is physical. Even if you have vacancies, filling those will not bring as much value as physical improvements. Updating bathrooms, floors, kitchen appliances, boilers, roofs, etc. will all bring you a massive ROI by being able to increase rents and sell the property for a higher value than it was purchased.
3.) Time and Energy
Labor intensiveness with Retail and Multifamily properties are much different than one another. Typically with multifamily properties, maintenance and other problems will remain ongoing throughout the life of the property. Now, same with Retail properties. So why are they different? Retail properties typically are signed to Triple-Net leases. A triple net lease is where all property management/maintenance fees are the tenant’s responsibility. Making the tenant responsible for their own space makes the overall investment more passive for the investor. Most times it is beneficial to use an Asset Management Company for retail properties. These groups can analyze leases, coordinate property maintenance, and management, help cut down expenses, and track financials. As for Multifamily, unless you decide to use a leasing agency or property management company, multifamily properties can be a lot of work. That depends on how old the building is, where your building is located, and other important factors. On the surface, Multifamily will be more labor intensive because you’re not protected by triple net leases and people have tenant rights when living in an apartment.
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