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The retail real estate market is experiencing a resurgence after years of downturn. According to The Wall Street Journal, U.S. retail vacancy fell to 6.1% in the second quarter of 2022, the lowest level in at least 15 years, as more stores opened than closed last year for the first time since 1995. It’s a shift that will position many brick-and-mortar businesses in cities nationwide for success.
Apart from the office sector, which is lagging due to virtual work, the forecast for the commercial real estate market, particularly retail space, is rosy, despite rising interest rates and a slowing economy. In fact, demand for retail space has remained positive for seven straight quarters, according to the National Association of Realtors.
The franchise industry can benefit from this rebound in two ways — through increased consumer traffic in retail corridors and through new real estate opportunities for retail businesses that will draw workers back into the office.
Related: The 28 Facts Franchisees Need to Know About Real Estate Leases
Opening a franchise can be a dual investment strategy
As demand for retail real estate grows, investing in a franchise that includes real estate becomes more lucrative. You’re not only opening a business concept that will likely generate income, but you’re also investing in a piece of property that will create a flexible exit strategy. This is true for both franchisees purchasing land and building from the ground up as well as those purchasing pre-existing space that can be renovated for their specific use.
If you’re in an area where purchasing real estate is especially difficult, there’s still good news. Because more commercial real estate is being developed and leased, franchisees have more diverse options for renting space in ideal locations that are already established. Leasing a location offers franchisees the opportunity to open their business without the increased risk and costs of being a developer of the land or building as well. Typically, a lease location will require less initial cash to start up your business versus building out your own facility. Preservation of that cash can help you keep some reserved as you ramp up your business or can allow you to open multiple locations at a faster pace than you may have otherwise.
What it comes down to is the long-term investment strategy of a franchisee. Are you planning to become a multi-unit owner and open locations as fast as possible? In that case, leasing could be the best option as it preserves cash and maintains Small Business Administration (SBA) lending flexibility. A dual investment strategy of starting a business and becoming a real estate developer in the process makes owning the building more appealing. It also offers various exit strategies. You could sell the business, keep the building and become the landlord. Or you could sell the building and retain the business, taking the proceeds to open another business or another real estate investment.
The potential drawback of owning real estate is how quickly you open another location. You may have used all your initial cash and will need to build cash in future years to open additional locations. There are also some potential restrictions to consider should you utilize Small Business Administration-backed loans versus a conventional loan path. Ultimately, it’s about the long-term investment strategy you have for yourself and for your family.
Related: Franchise Real Estate Tips and Strategies
Franchisees can access a pre-existing customer base
It’s my experience at Kiddie Academy Educational Child Care that some franchise opportunities, like child care, don’t need a “Main Street” location, because they are destinations. Many retail businesses need to be on a main road for visibility and accessibility, since those are primary drivers of their business. However, when the business is a destination, the location is not as much about attracting an impulse purchase, but instead housing something that is a necessity. Families are actively seeking premium child care for their children — if you build it, they will come.
Cluster retail locations are convenient for customers
At Kiddie Academy, many of our new locations are moving to places that will provide complementary services to families like a pediatrician’s office, dentist, etc., which helps to create convenience for those families. Allowing a customer to schedule several services and appointments without having to travel far is integral to raising the market value of a particular property.
Retailers also prefer to have certain franchise locations nearby, as some businesses can be excellent neighbors for retailers. Child care, for instance, draws each family twice a day, five days a week to their locations and provides exposure to surrounding businesses. There’s a symbiotic relationship — retail stores and franchise locations can each do their part in drawing a unified customer group.
An upturn in the retail real estate market is a big win for the franchise industry. As foot traffic picks up in the retail sector, the current environment is primed for franchise success. It’s a great time to consider a new entrepreneurial endeavor.
