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Retail space at mall as an investment

DEWDROPS

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There is a mall opening right beside crossiron mills mall at Balzac (calgary). Is buying retail space to lease out a good idea for long term? Usually mall retail space is not available for individual investors. The mall is called new horizon mall, Asian themed same as pacific mall at Markham, same builders.

Interest rate is a bit high around 6%.

Has anyone invested in this type of products? Any input appreciated.
 

Matt Crowley

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Usually malls are held by a single owner rather than condominiumized. Common area costs (CAM) can become as large as rent depending on mall utilities, advertising, maintenance... I imagine the advantage for the unit owner is they do not pay a % of their revenue to the mall since they own the unit. Valuation-wise of the unit you will need to dig around to find out how individual units are valued. Malls are valued as NOI / cap rate. A single unit will likely be valued differently...I imagine you will always be pulled down or up to the average $PSF of the building on average with an adjustment for current tenant in the unit. My guess would be full retail macro exposure without the ability to implement a business plan at a mall-level to increase income.

That being said, retail is an area of opportunity in Calgary and will definitely grow in the coming years.
 

Thomas Beyer

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Like any real estate, much depends on location, price, vacancies and management. In retail visibility and access is critical. X Iron Mall is overbuilt, not that busy and retail nearby competes heavily with excessive retail space nearby. You need to be very knowledgeable to make it a go, even more than residential.

Your question is a bit broad, along the lines of " what car shall I buy " ? You should be more specific to get good answers, such as lease rates, access, price, price per sq ft etc

You can lose your shirt in residential real estate or make a fortune in retail, or vice versa.
 
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DEWDROPS

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Like any real estate, much depends on location, price, vacancies and management. In retail visibility and access is critical. X Iron Mall is overbuilt, not that busy and retail nearby competes heavily with excessive retail space nearby. You need to be very knowledgeable to make it a go, even more than residential.

Your question is a bit broad, along the lines of " what car shall I buy " ? You should be more specific to get good answers, such as lease rates, access, price, price per sq ft etc

You can lose your shirt in residential real estate or make a fortune in retail, or vice versa.

Here are the details:
Price: I am looking at a triple and a double unit. Triple unit price 539800 (net 436 sqft), double unit price 349800 ( net 280 sqft). Both units are close to one of the main entrances of the mall, there are 2 main entrances.
Other costs: 1.50$/net sqft/month. For example, 300 sqft will be 450 pm. Water cost - Cost plus 15% (cold water only), Tax is 1% of assessed value.
Location: 32 mins from Calgary downtown, just outside of city limit, across crossiron mills mall.
Management: http://www.torgan.com/Home.22.0.html
Parking: 1400 stalls,400 underground
Dues: 25% due by Jan 2018

Video:

Thanks everyone for the replies.
 

Thomas Beyer

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Here are the details:
Price: I am looking at a triple and a double unit. Triple unit price 539800 (net 436 sqft), double unit price 349800 ( net 280 sqft). Both units are close to one of the main entrances of the mall, there are 2 main entrances.
Other costs: 1.50$/net sqft/month. For example, 300 sqft will be 450 pm. Water cost - Cost plus 15% (cold water only), Tax is 1% of assessed value.
Location: 32 mins from Calgary downtown, just outside of city limit, across crossiron mills mall.
Management: http://www.torgan.com/Home.22.0.html
Parking: 1400 stalls,400 underground
Dues: 25% due by Jan 2018

Video:

Thanks everyone for the replies.

Over $1200/sq ft ? For retail ?

What kind of rents do you need to get to make this a go ? Using a 6% CAP rate on the double unit you need to get $21,000/yr or almost $2000/month for a tiny tiny stall plus op costs or triple net. What kind of tenant would this be ?

Why not buy a REIT instead with a higher yield and no work. Can be 70% levered on margin too.

Where's the upside here ?

What are comparable malls or stores going for ?
 

Martin1968

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You need to be very knowledgeable to make it a go, even more than residential.

This is so true.
When it comes to investing in commercial space, you need to understand what type of renters you are going to attract in the space or building you are investing in, the risk associated with renting to (in this case) small (often start up) business owners.
Familiarize yourself with things such as tenant improvement allowances, triple net rents, common area maintenance and many other aspects of being a commercial landlord.
It can be very lucrative, but you do need deeper pockets for when your space stays empty, what you are on the hook for when investing in small bays such as in New Horizon Mall and so forth.

That being said, retail is an area of opportunity in Calgary and will definitely grow in the coming years.[/QUOTE]

I'm not so sure why retail is an area of opportunity in Calgary. I see lots of empty spaces all around.
I'm actually wondering if North America is going to see the same trend as what we already see in a big part of (western) Europe, where online retailers are on the rise and many traditional storefront businesses have closed down. Landlords can't fill spaces even when they give it away.

Maybe New Horizon is an exception, I really don't know enough about this kiosk type of idea of retailing. It could be a huge succes, but it could also be a huge failure. Personally I would be very careful investing in it at this stage in the game. At least do good research. Try to get in touch with investors that own in the similar mall in Markham. Good luck on it.
 

DEWDROPS

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Over $1200/sq ft ? For retail ?

What kind of rents do you need to get to make this a go ? Using a 6% CAP rate on the double unit you need to get $21,000/yr or almost $2000/month for a tiny tiny stall plus op costs or triple net. What kind of tenant would this be ?

Why not buy a REIT instead with a higher yield and no work. Can be 70% levered on margin too.

Where's the upside here ?

What are comparable malls or stores going for ?

Area- The list says effective area is 51%. Triple unit gross 855 sqft (net 436 sqft), double unit gross 570 sqft (net 280 sqft)
Potential rent- Single units suggested lease rate is 1500 pm (as they say).
Tenants- No idea about tenants at this point. They will probably be start up businesses/entrepreneurs/small import-based businesses. Major retailers won't be there as far as I understand as this is European bazaar style small shops. I don't think major retailers will have presence there. I would imagine this mall will be a place for bargain-hunters and bubble tea consumers.

REIT-Sorry I am not familiar with REITs that much. Are those stocks? Fully invested on equities at this point. I am afraid that Kim jong un missile may drag my portfolio down 30% overnight as the market is hovering over the highs for a while now. Do you have any REIT in mind that looks attractive?


Shoppers - Attached picture was taken from Toronto pacific mall. It gives a rough idea about the shoppers it would attract. View attachment 1001
 
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Matt Crowley

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I'm not so sure why retail is an area of opportunity in Calgary. I see lots of empty spaces all around.
I'm actually wondering if North America is going to see the same trend as what we already see in a big part of (western) Europe, where online retailers are on the rise and many traditional storefront businesses have closed down. Landlords can't fill spaces even when they give it away.

C and B- product in Calgary, look at comparable retail per capita in Edmonton. Lots of room for growth in Calgary. Recession is not permanent and Albertans love to spend on retail.

$1250/SF to buy retail is too much for Calgary. You can buy downtown retail in Edmonton or Calgary around $550.
 

Thomas Beyer

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C and B- product in Calgary, look at comparable retail per capita in Edmonton. Lots of room for growth in Calgary. Recession is not permanent and Albertans love to spend on retail.

$1250/SF to buy retail is too much for Calgary. You can buy downtown retail in Edmonton or Calgary around $550.
Apparently the gross is twice as big, although I do not know what "gross" means in terms of retail ? Storage space in the back ? upstairs for stock and a small office ?

Retail, in this location even at that price MAY MAKE SENSE if rents are properly researched & sustainable. Are they ? Retail performance is always a function of the tenants' strength and ability to pay.
 

Matt Crowley

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@ThomasBeyer yes... underwriting the tenant as much as the property. And startups are terrible businesses to underwrite or own given failure rate. At my previous job there was considerable disdain for Whyte Avenue for this reason, huge amount of churn and unestablished businesses. Not a very successful retail area from a landlord perspective.

Gross vs. net seems to vary from retail leases I've seen, much like commercial. Haven't uniformly adopted BOMA measurement standards. So may include storage space, utility areas, office spaces. Gross twice as big though? I suspect they are allocating a slice of the mall common areas for calculation of CAM. Totally depends on what they want to use as a basis for the split of common area expenses.
 

Martin1968

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In leasing traditional retail space, it doesn't matter wether there is storage space in the total sq footage, you always pay the same price per sq footage, as well as CAM on the total sq footage.

Gross area in this case seems to be calculated based on your proportionate share of the common areas.

As long as you rent at triple net your tenant will be on the hook for all cost.
However, it's been mentioned a few times that your clientele will be small entrepreneurs and/or start up businesses. The fail rate is a high percentage. Would definetely look at all aspects.

Based on the info shared I would not jump out of my chair to invest. Having said that, seems like 95 % was sold out in no time. who knows. 10 mins down the road from me so i'm curious to see what it is all about.
 

DEWDROPS

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Did some research on the going rental rate of retail space in Calgary. Most of the malls don't sell retail space, so wasn't
able to compare that.

Rental rate comparison:
Deerfoot meadows 3.4$ pm/sqft
Crossiron mills 8.33$ pm/sqft!! (depending on location, but they have no vanacy right now)
T&T mall NE (Pacific place) 5$ pm/sqft

I have no idea why the spread in gigantic between crossiron mills (out of town) and deerfoot
meadows (inside city, nice location and great access from same deerfoot trail).

This upcoming New horizon mall suggested retail rate 11$ pm/sqft. Does that make sense? Wondering why retailers would
rent in a new/untested mall when established malls charge less than half. However, crossiron mills rate is sky high
which is just across the street. Is there anything special about the area?
 
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Thomas Beyer

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$100-150 is probably per year per sq ft ie $8-12/month plus triple net costs of CAM, utilities and property taxes
 

Martin1968

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My first question to you is what you mean with pm/sqft. Are you trying to say per month? if that is the case then know a term that isn't used to rent out retail space. a price per sq ft is an annual price, for instance 5000 sq ft at $100.00 per sq ft cost you $500.000 annually divided per month.

Secondly, someone already mention d about the different classification for retail spaces (A,B,C) but classification could partly be a location, however retail space rental rates are based on a sales per sq ft for the location you are interested in leasing.

For example, when you say Cross Iron at $100 to $150 per sq ft, in order to demand these lease prices you as a lessee wants to know what you can expect to get out of it in sales per sq ft.
Often malls will come up with an average, but for you as someone that wants to lease you want more specific info. For example sales per sq ft in the food court area with about a 300-500 sq ft bay are higher, and thus expect a higher price per sq ft, compared to a 6000 sq ft bay somewhere else in that same mall where the sales per sq ft will be well under the average. Rent per sq ft will be lower.
When you would talk to 20 different businesses inside that mall expect that no one will pay the same per sq ft. Prices will fluctuate from appr $50 to $150 or higher per sq ft.
Also understand that price per sq ft mentioned are usually base rent only. On top of that lessees will pay an X amount per sq ft for CAM.

Hope this helps.
 

DEWDROPS

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$100-150 is probably per year per sq ft ie $8-12/month plus triple net costs of CAM, utilities and property taxes

You are right. When I talked to the leasing manager over the phone, I heard that wrong. Sent an email for confirmation, it's 100-150 per year. Now makes better sense.
 

Matt Crowley

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I have no idea why the spread in gigantic between crossiron mills (out of town) and deerfoot
meadows (inside city, nice location and great access from same deerfoot trail).

Do the malls have foot traffic / customer demographic / spend information? This should be the underlying reason (you may be able to request the information even if no vacancy, they may have waiting lists).

Retail rates are closely guarded by leasing brokers but you can reach out and maybe someone at CBRE, Colliers, AY, CW will discuss with you.
 

Martin1968

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Retail rates in general are no secret and advertised and available. However what most starting business owners don't know or realize, is that rates are (almost always with certainty) at the highest possible level For example when a powercentre strip mall advertises rates at 32.00 P/sqft NNN, it's a starting point. That is, if they would even consider to negotiate with you.
Malls like Cross Iron, or any high profile powercentre malls are not particularly interested in start up businesses, even start up or small franchises will have a hard time getting in on it.

When you have a strong franchise behind you, or even better, you run a strong corporate store concept with multiple locations, it opens doors and that advertised rate at $32.00 NNN can drop as much as 40% for the first year and escalating over a 5 yr period. If you, your franchise organization, your own leasing agent or in some cases a lawyer knows his way around they will negotiate a balanced lease contract on your behalf, to a point where you will get reimbursed for Tenant improvement Allowances ($ based on the ultimate sq ft occupied and price per sq ft) as well as 2,3 or 4 months free rent in your first year.
Oh, and when you are a small guy and they would consider you, you will sign a PG, often covering the whole lease term for when things go haywire.

I realize all this is written from a business owner perspective, not an investor. but it helps you to understand who your clientele is.

Now, to go back to your topic of New Horizon, It truly is a different concept there is no question about that.
When it comes to investing 540K for 3 bays and based on $1500 per month per bay it would bring in $54000 annually. (I hope I read all your info right)
And you would make sure all leases are triple net. I wouldn't t think it's a terrible terrible investment, but you really need to understand the retail business and what you are up against and what can happen to you as an investor. When a tenant goes belly up, it's not just your mtg payment that you are on the hook for but you will also pay all cost associated with that bay that was all covered under the triple net lease. Yes you can go after the defaulting tenant, but again you need deep pockets to sit it out.

Anyhow, I could go on with many examples of what I have seen over many years in the business.
You can make money for sure, it all depends on where you are at in your investing adventure.
Personally I find residential R.E. a tad safer.

Greetings.
 

DEWDROPS

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This thread has saved me from financial ruin. I had to pass this retail opportunity after reading all the words of wisdom here. My friends were extremely interested and thought I was passing a great opportunity but they are thankful now.

This giant ghost mall appears to be a disaster for investors:
https://www.cbc.ca/news/canada/calgary/new-horizon-mall-calgary-retail-business-1.4831026
https://globalnews.ca/news/4473734/calgary-new-horizon-mall-empty/
http://dailyhive.com/calgary/new-horizon-mall-empty-2018

I met few nice people at their presentation center, feel sorry for them now.

This thread is a perfect example of the power of collective wisdom and why we should absolutely pay attention to experienced investors.
 
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