Location Location Location
In the world of retail, one mantra reigns supreme: location, location, location. While catchy storefronts and well-curated product lines are important, the retail’s physical address can make or break its success. As a retail investor, selecting the right location is crucial for attracting tenants, maximizing your returns, and securing long-term cash flow. Here's why location is king and how you can find the perfect spot for your next retail venture:
The Importance
Imagine you're a retailer. Picking the perfect spot for your stores is like finding the golden goose. A good location means plenty of customers, plenty of sales, and consequently, profitability. Sure, a prime location might cost more, but the potential surge in sales can easily justify the price tag. A 2018 study by JLL Retail showed that stores in prime locations can generate 30-50% more sales per square foot compared to those in average locations. [1] This translates to a significant increase in revenue even with a smaller store footprint. A 2023 report by CBRE indicated that prime retail rents in major US cities can range from $100 to $500 per square foot annually, compared to $20-$50 per square foot in suburban or less desirable areas. [2] With that said, let’s take a look at what constitutes a prime location.
The Trifecta
It sounds like common sense but what actually makes a good location? Very fitting for the three-word saying, we like to divide location in three categories for the site selection process.
The neighborhood
The immediate area
The property
Each category has its own dynamics to consider when selecting a retail investment. Whether buying on spec or purchasing a stabilized asset, when all three closely align with your specific investment strategy, it’s a good indicator that you should move froward with the deal.
The Neighborhood
Neighborhoods play a crucial role in choosing a retail site because they essentially define the customer base and the overall success of your site.
Demographics: Match the target market to the neighborhood's residents. Age, income level, family size, and population all play a part. A high-end furniture store wouldn't do well in a neighborhood filled with college students just like an arcade wouldn’t do well in a neighborhood comprised of age 65+ retirees.
Shopping Habits: Consider how people in the neighborhood typically shop. Do they prefer quick trips to convenience stores or leisurely browsing at specialty shops? This can influence the type of stores that would thrive in the area.
Community Vibe: Consider the overall feel of the neighborhood. Is it trendy, family-oriented, or established? Match the vibe of potential tenants to the character of the area.
Growth Trajectory: It’s imperative to think long-term under site selection. Choose a neighborhood with a positive growth outlook and development plans that will benefit your tenants. A currently booming area on the decline won't offer the long-term stability you need for secure cash flow
The Immediate Area
Beyond the broader neighborhood, the immediate area surrounding your potential retail site acts like a microcosm, offering more granular details to consider. By carefully examining the immediate area, you can gain valuable insights into the day-to-day customer experience and ensure your site is not just in a good neighborhood, but on a prime spot within that neighborhood.
Existing Retail: Perhaps the most important dynamic in the immediate area, you need to analyze the mix of retail already in place. How many tenants are there? What type of tenants are there? Are they complementary stores? i.e. a Chipotle for a Starbucks or vice versa. Are they national tenants? Are they credit tenants? Are there too many vacancies? How large are the spaces? The type of tenants in the immediate area is a SUPERB indicator on the feel and success of a specific area.
Aesthetics and Ambiance: The overall look and feel of the immediate area can influence customer perception. Is it clean, well-maintained, and inviting? Does it align with the image you want to project for your potential tenants?
The Property
The property itself plays a significant role in choosing a retail location.
Size and Layout: Does the size of the property match your tenants needs? Consider the type of retail suitable for the site. Frontage plays a large part in relation to the road it sits on. An awkwardly shaped layout might be difficult to utilize efficiently, impacting your ability to lease.
Traffic Patterns: For obvious reasons, the amount of daily traffic that passes by the site is essential to recognize. However, it's not just about the volume, but the flow and direction as well. Are there natural pedestrian pathways that funnel people past the location? Is there a busy intersection that creates a constant stream of potential customers? Is the site located on the AM or PM side of the road?
Visibility: Even with a great location on a busy street, consider if the retail is easily visible from the main road. Are there obstructions like trees, buildings, or poorly placed signage that might make it hard for customers to spot your tenants?
Accessibility: Consider features like bus and subway stops, or bike lanes nearby. These will drive more traffic to the location while making it more accessible to a wider range of customers.
Parking: Evaluate the parking situation specific to the property. Is there dedicated parking for customers, or will they have to compete with other businesses or residents?
Signage Options: Local zoning regulations might restrict the size and type of signage allowed. Does the property offer options for prominent signage that will effectively advertise the retail? Consider factors like pylon signage, roof signs, window displays, and sidewalk signs.
Condition and Functionality: If there is already a building, evaluate the overall condition. Is it structurally sound and well-maintained, or are there potential repairs or upgrades needed? Consider factors like lighting, HVAC, plumbing, and accessibility features like ramps or elevators. An outdated or poorly maintained property can require substantial CAPEX for you or your tenants. Investment returns and lease negotiations will be affected.
Omnichannel: Remember, the retail world is no longer confined to physical stores. The ideal location should consider the role of online presence as well. Can customers easily buy online and pick up in-store? A seamless omnichannel experience is becoming increasingly important.
Expansion Potential: Think about the future. Does the property allow for potential expansion? Is there additional space available within the building or on the property for future tenant needs?
Consider the foot/vehicle traffic, accessibility, and visibility in Times Square and its relation to rental rates in the immediate area.
The Power of Place
In conclusion, the success of your retail investment hinges on choosing the right location. But location isn't a single factor; it's a trifecta. By taking a comprehensive approach that considers all three layers – neighborhood, immediate area, and property – you can confidently invest in “tenant magnets.” Simply select your sites that guarantee long-term profitably for your tenants and subsequently… you!
Sources
[1] JLL: https://www.us.jll.com/en/trends-and-insights/research
[2] CBRE: https://www.cbre.com/insights#market-reports