Retail Condos Trump Traditional Net Lease Investments

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Retail condominiums are growing in popularity for investors looking for a new outlet.

 

PolsinelliNEWSMove aside, multifamily.

In the ever-changing world of commercial real estate, retail condominiums are taking their rightful place on the list of real estate asset classes. As the urban equivalent to the suburban strip center and the popular single-tenant, net-leased asset, retail condominiums are the perfect solution for investors who want to get into real estate without the headaches of building issues or intense management.

For newcomers to the arena, retail condominiums are the retail portion, usually the ground floor and sometimes basement, of a property that has been converted to condominium ownership. With a retail condo, an owner acquires a deed to the unit and pays real estate taxes and a common charge for maintenance of the building as a whole.

Historically, low interest rates have created opportunities for investors and retailers alike. For retailers, it's a viable option to consider buying their space as the rent starts to become close to or equivalent to the debt service on a loan. In cities with high property values, buying is a smart investment and provides a hedge against inflation, as well as the benefits of future appreciation. Notably, New York City – America's retail mecca – has the largest inventory of retail condominium sales, accounting for more than 60 percent of all retail condominium sales nationwide.

So what's driving demand? It goes back to economics 101: retail condos have less supply, which, in turn, provides greater resale values. For example, properties with strong leases are more easily financed by lenders, making it a great investment vehicle for growing one's real estate portfolio. Owning is also an advantage for the small business owner seeking a loan as there is the collateral of the real estate.

Traditional net-lease investors who favored freestanding single tenant net-leased retail properties are now diversifying into retail condos as they offer many of the same advantages. Investors are seeing the benefit of buying in locations that traditionally exceeded their budgets. Real estate assets in urban areas tend to retain their value better than assets in suburban locations making urban retail even more attractive to net-lease investors. However, most net-lease investors have been priced out of urban markets because the only available investments were entire buildings with price tags in the tens of millions, if not hundreds of millions.

Along with the tax benefits of ownership, retail condominiums are smart investment vehicles with fewer barriers to entry.

Buying a retail condominium is an easy way for investors to participate in the real estate market as little management is required. Retailers are also jumping in seeing that they can own their stores and control their future. If their business doesn't do well, they will be left with an asset that has value.

And you won't get calls from your tenants in the middle of the night.

— Adelaide Polsinelli is senior director of Eastern Consolidated in New York City. Contact her at ap@easternconsolidated.com

 

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