Do you consider mixed-use properties when looking for commercial real estate deals?
Many investors love multifamily but struggle to wrap their heads around retail, office, and mixed-use properties. Recently, I interviewed Ash Patel, who has a different view. He is a commercial real estate investor who loves everything but multifamily. With a focus on retail, office, self-storage, and industrial, Ash loves that his tenants are only there during business hours and have a vested interest in the upkeep of the facility. These businesses cover a portion, if not all, of the expenses and are responsible for the build-out of their space.
During our episode with Patel, we discussed mixed-use properties, which fall into “no man’s land” for many investors. Retail and office investors don’t want to deal with the residential component. Multifamily investors can’t figure out how to evaluate the retail or office element. Due to this, these properties often linger on the market.
When I lived in Chicago, I came across numerous mixed-use properties with commercial units on the first floor and apartments up top. I passed on all of them, only seriously considering a couple. I was concerned that the commercial units would be difficult to fill and to mitigate this risk, I wanted a steep discount on the purchase price. The sellers were almost always owner-operators who self-managed and assured me that the commercial units had strong demand. Nonetheless, I prioritized properties that were purely multifamily.
In an environment where many are seeking cash flow, or yield as industry vets like to say, mixed-use properties present an opportunity for newer investors to achieve higher returns and face less competition. This could be an ideal strategy to plant your flag on this no man’s land and build a niche for yourself. If you are interested in acquiring a mixed-use asset, here are three areas where you will need to pay special attention.
Location is always key for real estate and mixed-use assets are no different. However, in this case, you want to focus on areas that are ideal for both multifamily and commercial. Finding a location that works for multifamily, office, and retail can be tricky.
Multifamily demand is driven by infrastructure, nearby amenities, and access to employment and nightlife. Foot traffic and visibility are key for retail. Office can be a bit more flexible, but parking and accessibility are essential. You should also make sure the property is properly zoned for mixed-use or any usage you plan to pursue. Find a property that has the right mix of visibility and access to nearby amenities, and you have found the first element of a great mixed-use opportunity.
Residential leases are drastically different than retail and office leases. For starters, residential leases are typically for 12 months, and residents are screened based on credit score and income. Owners are responsible for expenses but may bill back a portion of utilities.
Commercial leases are often multi-year leases. They often bill back some or all of expenses, including taxes and insurance. Tenants are screened based on credit rating and the tenant’s revenue. Rent escalators can be built into the lease agreement. Understanding the leases and determining how to increase rents and other income is the key to creating value on these deals.
The last element you must understand is current demand. The best way to determine this is by understanding market rates for comparable commercial units. The rent-per-square-foot metric allows you to compare other commercial units in the area to determine what you could expect going forward. Areas with higher foot traffic or greater visibility will be able to charge more, so keep this in mind when comparing commercial units.
For multifamily units, you want to look at comparable apartments, focusing on the unit mix, rent per square feet, and finishes. A local agent that specializes in commercial leasing should be able to provide comps that give you a sense of current demand.
If you’ve been hesitant about pursuing mixed-use properties, consider these three elements to get more comfortable evaluating multifamily and commercial units. Another option is to partner with someone who understands and likes the side of the business where you are less familiar.
Adding mixed-use properties to your consideration set can give you a competitive advantage when searching for your next property.
About the Author:
John Casmon has helped families invest passively in over $90 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Target Market Insights: Multifamily + Marketing. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.