Playbook #103: Small Plot Office & Retail Leasing
🖼️ The Big Picture
In general, office and retail space are both facing major challenges and headwinds in terms of where the world is going, however, while some are struggling, others are thriving… and there’s a lot of opportunity here for the right investor.
This issue is continuing the conversation from our last one on “converting office buildings to apartments” with a bit of a different spin. Here, we’re exploring the opportunity to invest in small, select offices and retail spaces that can be bought as is, renovated, or converted to lease them out.
The advantage to this type of renter is that tenants typically sign long-term leases and they can be NNN (triple net), which is the closest thing to “mailbox money” in real estate.
However, there are significant challenges, making it all the more important for strong Investor DNA alignment… including:
- Almost 20% of office space in the U.S. is vacant
- Many more leases are expected to expire in the coming years thanks to the remote/hybrid working environment (which has now led to the highest job satisfaction in 30 years)
- Commercial real estate is in serious trouble in this high-interest rate environment
- Sales for major retail chains and many small business owners are declining as E-Commerce continues to steal market share. Bed Bath & Beyond, Party City, and David’s Bridal have all declared bankruptcy in 2023, following other big names including Toys R Us, Sears, and JCPenney.
Retail owners’ biggest challenge is E-Commerce, yet some turned the challenges of the pandemic into a stronger business model in the long term.
Office space’s biggest challenge is working from home, but small, high-quality offices can find a space to succeed for companies with a hybrid model (working partly from home, partly from the office). And some businesses, like the medical industry, will always need office space.
As you dig into this opportunity, you’ll find the challenges and criticisms from investors are legitimate. Some people simply won’t touch office or retail space. Others are able to do extremely well with it.
In this playbook, we’ll explore some of the ways investors are doing well, what to watch out for, and who this opportunity could align well with.