In the age of Amazon, commercial strip centers are a sound retail investment. They are generally populated by service providers and restaurants, things that the internet cannot easily replace. Common tenants include: hair and nail salons, insurance agents, tattoo artists, restaurants and tax preparers, among other things. Most of these are services and cannot easily be outsourced to the internet. The challenge comes that many of them are working hard to make ends meet and you have to communicate with them to collect rent. We manage several of these centers and are owners in two of them in Modesto.
Here are five tips to quickly increase the value of your centers by 10%:
- Make some basic improvements before having rental rate conversations with your tenants
Strip centers are often neglected by absentee owners. They are left with bad 1970’s facades, the plants are all dead and the roof has not been repaired in years. Start the value add process with the two most cost-effective solutions: paint the center and update the landscaping and sprinklers. A new coat of paint is a few millimeters deep and a mile wide, it instantly makes any building look new and fresh. Talk to your local Kelly Moore or other paint rep to get ideas on the latest colors. We often drive around, find other buildings that we think look great, and model our colors on theirs. The second part is the plants. It is not that hard to have someone check your sprinklers and then add a few plants. All of this sends a message to the tenants—your customers—and the tenant’s customers that you are making the place better.
Modesto Commercial Strip Center
- Let go of some tenants
This is hard to do but chances are it is time to move some of those old month to month tenants on. Likely their rents are below market rates but you hate to rock the boat. Recently I have had to give out several 30 day notices and part ways with a few tenants. My rationale was that I wanted to redefine a center and upgrade rents and tenant quality. We did this along with investing fresh money into the look of the center.
- Go NNN
This is a big one. When you convert your tenants to NNN, you take risk out of the center immediately and increase the investment quality of the center. When you go to sell it, buyers will pay a premium for this. This requires getting new leases signed and having some difficult conversations but if you have recently put money into the center and have also let a tenant or two go then the remainder of the group will know you are serious and will likely work with you or move on.
- Get some national tenants
Your center will command a premium if it has national tenants. Rather than getting the local insurance guy, get Farmers Insurance and rather than a local tax preparer, work to get H&R Block. Likely this will require paying brokers and realtors that work with these types of tenants but the upgrade in value likely be worth it.
Signage makes the center. If your tenants are visible then they will stay and pay a premium. Invest in a marquee sign or other light up signage. This cost will need to be reflected in your rents.
A well-run center is a joy to own. Your tenants will gladly pay a premium because they are getting more value and your investment will shine and sell for a premium.