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Mixed-Use Retail Properties: Pros & Cons of Ownership

Published: 01-18-24 Category: Buying

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The profitability of mixed-use properties stems from their unique combination of income diversification, increased foot traffic, cost savings, and alignment with market demand. These factors often make mixed-use properties a sound investment for commercial real estate (CRE) investors looking to expand and diversify portfolios.

Here, we'll explore the world of mixed-use retail properties, diving into the pros and cons of ownership, the maintenance and upkeep work involved, expected returns, and the types of contracts used for buying and selling these properties.

Pros of Mixed-Use Retail Property Ownership

Mixed-use properties are no different than other CRE property types in that they come with their own sets of unique benefits and challenges. Let's take a look at the benefits.

#1 – Diversified Income Streams

One of the key advantages of owning mixed-use retail properties is the ability to generate multiple income streams from different sources.

These properties typically include a combination of retail storefronts, residential units, and sometimes office spaces. This diversification can help mitigate risks associated with vacancies and economic fluctuations.

#2 – Increased Potential for Profitability

Mixed-use retail properties often offer higher returns compared to single-use properties.

By blending various uses within the same property, investors can realize significant value appreciation due to higher demand and increased foot traffic from residents and nearby businesses.

#3 – Enhanced Tenant Synergies

Mixed-use environments create a symbiotic relationship between tenants.

For example, a residential tenant living above a retail store can benefit from convenient access to amenities, while the retail tenants can enjoy a steady customer base of residents.

#4 – Favorable Market Conditions

In the years following the COVID-19 pandemic, mixed-use properties have gained popularity due to the rise of live-work-play lifestyles and the demand for urbanization.

This has resulted in increased market demand and potentially favorable pricing when it comes to buying or selling these properties.

Cons of Mixed-Use Retail Property Ownership

Now, let's take a look at some of the challenges involved with purchasing and owning mixed-use retail properties.

#1 – Complex Management

The combination of retail, residential, and potentially office spaces complicates the management process.

Property owners must navigate diverse tenant needs, ensuring the seamless operation of various uses within the building complex.

#2 – Increased Maintenance and Upkeep

Mixed-use retail properties require additional maintenance and upkeep compared to single-use properties.

Property owners are responsible for maintaining common areas, such as parking lots, shared amenities, and lobbies, in addition to the individual units.

#3 – Regulatory Challenges

Mixed-use properties are subject to various zoning regulations and legal requirements. Regulatory and zoning requirements for mixed-use properties can vary depending on the jurisdiction and local regulations.

These requirements are generally imposed to ensure the property is developed and used in a manner that is compatible with the surrounding area. Common requirements include zoning restrictions that designate specific areas for mixed-use development, which may include a mix of residential, commercial, and industrial uses.

In addition, regulations may address building height limits, parking requirements, setback requirements, and environmental considerations. These requirements aim to maintain the balance between different land uses, promote pedestrian-friendly neighborhoods, ensure adequate infrastructure, and minimize environmental impact.

Owners must stay up to date with compliance, which can be burdensome and time-consuming.

Maintenance and Upkeep Expectations

New mixed-use property type owners can expect to deal with several maintenance and upkeep challenges. Some common tasks include the following.

#1 – Regular Property Inspections

Conducting routine inspections is essential to identify any maintenance issues and address them promptly.

This includes checking for plumbing problems, electrical issues, HVAC maintenance, and structural integrity.

#2 – Common Area Management

Mixed-use retail properties often have shared spaces that require regular maintenance, such as parking lots, hallways, elevators, and communal facilities.

Owners must allocate resources to ensure these areas are kept in good condition to maintain tenant satisfaction.

#3 – Building Systems Maintenance

Owners will need to maintain and service various building systems, including fire protection systems, security systems, elevators, and HVAC systems.

These systems directly impact the safety and comfort of tenants.

#4 – Vendor Management

Property owners must engage and oversee external vendors, such as janitorial services, landscaping, and security personnel, to ensure their work aligns with the property's maintenance standards and requirements.

Expected Returns

Returns on mixed-use retail properties can vary based on multiple factors, including location, quality, market conditions, and tenant mix. However, with strategic investment decisions and effective property management, investors can expect favorable returns.

According to industry data, the capitalization rates for mixed-use properties range from 4% to 8%, with potential for even higher returns in prime locations and markets with strong rental demand.

Contractual Considerations

When it comes to buying and selling mixed-use properties, various contractual arrangements are utilized. The most common contract used is a Purchase and Sale Agreement (PSA), which outlines the terms and conditions of the transaction. A Letter of Intent is often involved in the process, as well.

This agreement typically includes details on the purchase price, deposit requirements, due diligence period, financing contingencies, and closing process. Working with experienced real estate attorneys and brokers during the transaction helps ensure compliance with local regulations and the smooth completion of the deal.

Investing in mixed-use retail properties can be a lucrative endeavor, providing multiple income streams and diverse tenant synergies. However, potential owners must carefully consider the complexities associated with management, maintenance, and regulatory compliance.

By understanding these challenges and implementing proactive maintenance strategies, investors can reap the rewards of owning mixed-use properties. With careful planning, proper research, and assistance from industry professionals, mixed-use retail properties can provide a robust addition to an investor's portfolio.

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