Is Big Box Retail a Good Avenue for CRE Investors?

There has been a lot of discussion and concerns lately over the viability of big box retail as an investment. Many lenders are tightening their underwriting on loans for acquisitions on big box retail, and some have even just stopped lending on them. Should these concerns affect your investment criteria, or is this all just some hype? Overall, I believe that the concerns should be heeded, but like with anything, they should be taken with a grain of salt.

Like any investment an investor needs to take into account all aspects of the investment, and especially with real estate, an investor should concentrate on the fundamentals of real estate investing: Location, viability of tenant(s), competition/demand for the asset class and plans should anything unforeseen happen.

The first rule of investing in real estate is location, location, location. This is true for all types of real estate, but especially for specialized types such as big box retail.  When looking at this asset class an investor must look to see if the community can support a large retail store as well as the cost of the land in the area and what barriers to entry there are for other competitors. If the city you’re looking at is a dense infill location with not many opportunities for redevelopment or for building new big box retail stores, this creates a demand for the location, minimizing the risk should the current tenant go dark, or worse, go out of business.

A key part to any investment in real estate is the tenant. When looking at big box retail an investor must not only consider the location but also the viability of the tenant’s business. Many people remember Blockbuster Video, but as technology changed so did people’s renting habits. Instead of going to a store to rent a DVD many people would just stream a movie on demand. Technology ended what was once a viable business model causing many stores to disappear and leaving landlords looking for new tenants. With the large increase in online shopping one must take into consideration if, and how, that will affect the buying habits of the customer base of your tenants. Perception is that many online retailers dwarf the “brick and mortar” locations in sales, perhaps as a company they may; however, retail sales is a $5 trillion business, and the largest online competitor was $107 billion last year – a relatively small percentage in the overall sales.

A key indicator of health and demand of an asset class is the vacancy rate of similar properties. When looking to invest in a property, the investor should not just look at the property but also, and sometimes more importantly, the vacancy rate of other like buildings in the area. Although vacancy rates are up in some markets for big box retail many major metropolitan areas are experiencing historically low rates. Los Angeles is such a market. With land prices high and most lots already developed it can be difficult to build new big box retail locations. Los Angeles and Orange County are currently experiencing vacancy rates below 4.0%, an indication of a healthy market. Other submarkets to consider are New York, San Francisco and Chicago.

Lastly, when investing in big box retail an investor should also be looking to the future. Who would be a good tenant if the current tenant leaves? How can they reposition the property to better appeal to the demands of the market place? By considering and knowing the answers to these questions an investor can be prepared to quickly reposition an investment should it take a turn for the worst.

Overall, I believe that big box retail remains a viable investment opportunity, especially when an investor considers all of the above and makes plans for the future.

Image by Mike Mozart - Creative Commons License