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The retail property market is experiencing a revival after years of decline. According to The Wall Street JournalU.S. retail vacancy rates 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. mortar companies in rural towns for success.
Apart from the office sector, which is underperforming due to virtual working, the outlook for the commercial real estate market, especially retail space, is rosy despite rising interest rates and a slowing economy. According to the National Association of Realtors, demand for retail space has been positive for seven quarters in a row.
The franchising industry can benefit from this recovery in two ways: through increased consumer traffic in aisles and through new real estate opportunities for retailers that will lure workers back to the office.
Related: The 28 Facts Franchisees Should Know About Real Estate Leases
Opening a franchise can be a dual investment strategy
As the demand for retail real estate grows, investing in a real estate franchise becomes more lucrative. Not only are you opening a business concept that is likely to generate income, but you are also investing in a piece of real estate that will create a flexible exit strategy. This applies both to franchisees who buy land and buildings from scratch, and those who buy pre-existing space that can be renovated for their specific use.
If you’re in an area where buying real estate is particularly difficult, there’s still some good news. With more commercial real estate being developed and leased, franchisees have more diverse options for renting space in already established ideal locations. Renting a location allows franchisees to open their businesses without the increased risks and costs of also being a developer of the land or building. Typically, a leased location requires less initial money to start your business than it does to build out your own facility. Keeping that cash can help you keep some reserves as you expand your business or open multiple locations faster than usual.
What matters is a franchisee’s long-term investment strategy. Do you plan to become a multi-unit owner and open locations as soon as possible? In that case, leasing could be the best option because it preserves cash and preserves 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 attractive. It also offers different exit strategies. You can sell the business, keep the building and become the landlord. Or you can sell the building and keep the business, using the proceeds to open another business or real estate investment.
The potential downside to owning real estate is how quickly you open another location. You may have used all of your initial cash and need to build up cash over the next few years to open additional locations. There are also some potential limitations to consider if you use Small Business Administration-backed loans instead of a conventional loan path. In the end, what matters is the long-term investment strategy you have for yourself and your family.
Related: Franchise real estate tips and strategies
Franchisees have access to an already existing customer base
It’s my experience at Kiddie Academy Educational Childcare that some franchise opportunities, such as childcare, don’t need a “high street” location because they are destinations. Many retail businesses need to be on a major road for visibility and accessibility as those are the main drivers of their business. However, when the business is a destination, the location is not so much about attracting an impulse buy as it is about housing something necessary. Families are actively looking for quality childcare for their children – if you build it, they will come.
Cluster store locations are convenient for customers
At Kiddie Academy, many of our new locations are moving to places that will provide additional services to families, such as a pediatrician’s office, dentist, etc., helping to create convenience for those families. Allowing a client to schedule various services and appointments without having to travel far is integral to increasing 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. Childcare, for example, draws each family to their locations twice a day, five days a week and provides exposure to surrounding businesses. There is a symbiotic relationship: stores and franchises can each contribute to attracting a uniform customer base.
An upswing in the retail property market is a major win for the franchise industry. With retail foot traffic picking up, the current environment is poised for franchise success. It’s a good time to consider a new venture venture.