When Location Isn't Everything in Real Estate
Prime location is key to happiness for a homeowner and success for a shop owner, except when it's not.
No one can deny the real estate cliche – location, location, location – is at least partly true. A good location for a home or business can mean the world between happiness and success, while poor placement can lead to countless problems.
But is a prime location ever too good to be true?
For retail spaces in particular, location with consistent foot traffic and easy access to the storefront is a key part of the business’s success. But a prime location also means high rents, and if businesses can’t make enough to offset the cost to remain in such a location, they will be forced to vacate the space often.
For residential real estate, on the other hand, whether a popular location is a dream or nightmare can vary by region, price point and the type of buyer.
“We’re in a very weird time in retail, and real estate in general. Luxury listings are sitting on the market longer, seeing bigger price chops, and we’re seeing an increase in vacancy in retail as well as a decrease in asking rents,” says Andrew Feldman, an associate real estate broker specializing in commercial and newly developed properties for full-service real estate firm Triplemint, located in New York City.
We asked real estate experts to weigh in on whether the location mantra still holds true, and we break down the question between the two places consumers are most likely to be: retail spaces and your own home.
The retail industry is at a bit of a crossroads, as many companies make their biggest sales online and the golden years for major department stores and shopping malls appear to be fading fast. In May, Jan Kniffen, CEO of financial and management consulting firm J. Rogers Kniffen Worldwide Enterprises, told CNBC he expects up to one-third of shopping malls in the U.S. to close in the coming years.
But retailers struggling to flourish in a prime location isn’t anything new – because with high visibility comes high rent.
In the District of Columbia’s Georgetown neighborhood, the corner building at 3150 M St. NW has seen a couple of restaurants go in and out in that location over the years, despite being at the most-trafficked intersection by both cars and pedestrians in the entire neighborhood. The space is currently vacant, with work being done on the building and no announcements as of yet for a future tenant.
The space isn’t bad luck. It just requires a bit more consideration than just price per square foot and potential sales, explains Melina Cordero, head of retail research for the Americas at commercial real estate firm CBRE.
“A location like M and Wisconsin [Avenue] is not just a store, it’s a billboard,” says Cordero, who is based in the District of Columbia.
Similarly, in New York City, the former location of a popular restaurant, the Chelsea Gallery Diner, has been vacant since the hot dining destination closed in 2012. While it’s been hard for restaurateurs and other companies to imagine the space as something other than the Chelsea Gallery Diner, Feldman, who is the leasing broker for the property at 72-74 7th Ave., is using the location’s history as a selling point. The asking rent is $25,000 per month for the 2,500-square-foot space.
As Chelsea has transformed over the years from a primarily residential neighborhood to a central location for art galleries and nightlife, Feldman considers the location of a famous former restaurant is smart place to “make another destination space as the neighborhood is growing into more of a food-and-beverage location,” which the area is not yet particularly known for.
Particularly with the state of brick-and-mortar retail in flux, retailers have to re-evaluate what they consider to be a worthy amount of business. Rather than looking at the total sales in a store, a company with a solid online presence would do better to use a prime storefront location almost as a showroom, where people can enjoy the shopping experience, then buy online if they wish, Cordero says. Apple stores, for example, sell their products in-store, of course, but shoppers who visit brick-and-mortar locations are welcome to play around with and learn about the tech gadgets and can place an order at the store, or order online at home later.
This kind of reconsideration of retail strategy is happening industry-wide, as we see big-name retailers such as Sears, Macy's, Payless ShoeSource and Michael Kors closing dozens of locations nationwide.
Until the industry figures out where retail is going, “retailers are being extremely cautious” with location selection, Cordero says.
Neither Cordero nor Feldman see brick-and-mortar retail going away completely, and they still expect location to be an important factor in getting brand names to the public.
Since a prime location calls for a higher rent, those corner storefronts or iconic addresses will likely be harder to lease and keep occupied because it narrows the pool of potential businesses that can afford to go in there, though Feldman expects prices to slow their growth in the near future as retailers take a closer look at their brick-and-mortar priorities.
“It think that we’re at a time where prices got away from us, just like in 2007, and this is our correction to bring it back to what normal should be, not a dying or changing or significantly changing retail face,” Feldman says.
With the current state of the residential real estate market, however, buyers in hot markets all over the U.S. are paying a higher price and making additional sacrifices to live in their ideal location – and that trend doesn’t seem to be slowing significantly.
Mark Parrish, a luxury real estate agent in the Minneapolis-St. Paul area, says there’s no shortage of interest in the downtown residential areas. “It’s days on market versus months on market,” he says.
In fact, some buyers who can’t get into the neighborhood they want will purchase as close as possible to simply be near their ideal location.
“A lot of families are coming back to the city because they want to be closer to the sidewalks and walking to the restaurants and the lakes, walking paths and all that stuff,” Parrish says.
At the same time, in New York City's ultra-luxury market, which has seen significant focus over recent years from developers, Feldman says homes in this high price point are a bit slower to sell now than before. Rather than having an excess of demand, the development of residential buildings in desirable locations at peak prices now needs to wait a bit longer for the right type of buyer.
While location may be the reason you decide to buy a new home, Parrish recommends keeping other important factors in mind.
“A lot of conversations I have, when we walk in the door it’s always price, condition and location. … When those three go together, it’s a win,” he says.
In some parts of Edina, a suburb of the Twin Cities, Parrish says people are buying just outside of a prime neighborhood in order to be able to purchase new construction houses – a slight sacrifice of location for the condition they want.
Similarly, it’s not uncommon with today’s tight inventory for a buyer to happily take on a fixer-upper to get a lower price.
But when it comes to location, Parrish says, “There’s always a premium for that.”