Luna Harper
Hobby Lobby is an American arts and crafts retail chain with over 1000 stores in 48 US states. The company, founded in 1972, is known for its commitment to providing a wide range of creative and artistic products. Hobby Lobby's real estate strategy involves renting or purchasing existing buildings previously owned by big-box retailers and converting them into stores and warehouses. This approach allows the company to save significantly on construction and operating costs compared to building new spaces. While all Hobby Lobby stores are owned and operated by the company, they typically rent the properties they occupy, targeting locations in mid- to high-income suburban areas.
| Characteristics | Values |
|---|---|
| Number of stores | Over 900 in the US |
| Revenue | $5.6 billion in 2022 |
| Ownership | Privately owned |
| Business model | Rent or purchase real estate previously owned by big-box retailers |
| Lease terms | Initial term of 15 years with up to three, five-year renewal options |
| Rent increases | Throughout the base lease term and option periods |
| Landlord obligations | Varies, but generally the landlord is not responsible for the property |
| Store size | Up to 90,000 square feet |
| Customer draw | 10-15 mile radius |
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What You'll Learn
Hobby Lobby's real estate strategy
Hobby Lobby, the largest privately-owned arts-and-crafts retailer in the world, has a unique real estate strategy that has been integral to its success and competitive advantage. The company, founded in 1972, has grown from a 300-square-foot store in Oklahoma City to a vast chain of over 1,000 stores across 47 to 48 US states, with a revenue of approximately $5 billion in 2022.
The company's approach to real estate is also influenced by its commitment to its Christian values and morals. All Hobby Lobby stores are owned and operated by the company, ensuring a unified customer experience across all locations. The company is known for its unique practice of closing stores on Sundays, honouring the religious beliefs of its founders, the Green family.
Hobby Lobby's strong brand and consistent revenue make it an attractive investment option for landlords. The company typically offers long-term leases of 15 years with multiple renewal options, providing predictable revenue streams and reducing the risk of vacancies. Additionally, Hobby Lobby's ground and triple net (NNN) leases shift property maintenance responsibilities to the tenant, minimising landlord management obligations.
The company's aggressive expansion model has allowed it to take advantage of real estate deals and strengthen its position in the market. Despite potential risks during economic slowdowns, Hobby Lobby has continued its expansion plans, aiming to increase its presence across the United States.
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Renting vs. buying property
Renting provides flexibility and predictable monthly expenses, and it relieves tenants of the responsibilities and costs associated with homeownership, such as repairs and maintenance. Renting also allows individuals to move more freely, as they are not tied down to a property. However, renting may offer less stability, as individuals may have to move if the landlord decides to sell the property or increase the rent. Additionally, renters may have limited control over the look and design of their space.
On the other hand, buying a property provides a sense of stability, pride of ownership, and the freedom to make decisions about the property. It also offers tax advantages, such as deductions for mortgage interest and property taxes, and the opportunity to build equity. However, buying a property comes with significant upfront and long-term costs, including mortgage payments, property taxes, insurance, and maintenance. The process of selling a property can also be challenging and expensive, especially if the housing market is down.
In the case of Hobby Lobby, the company owns and operates all of its stores, maintaining a consistent approach to its retail operations. However, it seeks to rent existing large-scale facilities, such as previously occupied supermarkets or hardware stores, rather than constructing new buildings. This strategy allows Hobby Lobby to save significantly on lease costs compared to constructing new retail spaces. The company's strong reputation and popularity also make it an attractive tenant for landlords, as it provides a predictable revenue stream and reduces the risk of lease defaults or vacancies.
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NNN lease properties
Hobby Lobby, an American retail company, owns and operates all of its stores. The company, founded in 1972, started as a small arts and crafts store in Oklahoma City. As of January 2023, Hobby Lobby has expanded to include over 900 stores across the United States, with a revenue of approximately $5.6 billion in 2022.
Hobby Lobby typically seeks to rent large facilities, such as previously occupied supermarkets or hardware stores, in mid- to high-income suburban areas. This strategy allows the company to save significantly on lease costs compared to constructing new retail spaces.
Hobby Lobby's real estate approach includes investing in ground leases and triple net (NNN) lease properties. A triple net lease (NNN) is a commercial property lease structure where the tenant assumes responsibility for paying all ongoing expenses related to the property, in addition to the base rent and utilities. These expenses typically include property taxes, insurance, maintenance, and common area maintenance (CAM) costs.
NNN leases offer several benefits to both landlords and tenants. Landlords can benefit from a stable and low-risk source of income, with reduced overhead costs and minimal management obligations. The well-established brand of Hobby Lobby ensures a steady tenant, reducing the risk of lease defaults or vacancies. NNN leases also provide landlords with the advantage of long-term occupancy, as tenants typically seek to occupy the space for an extended period.
For tenants, triple net leases provide more freedom and control over the property. Tenants can benefit from lower monthly rents and the ability to customize and renovate the space to their needs without making a substantial capital investment. Additionally, NNN leases may offer protections against significant tax and insurance increases through the inclusion of caps on certain values.
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Ground leases
There are two main types of ground leases: subordinated and unsubordinated. In a subordinated ground lease, the landlord agrees to a lower priority of claims on the property if the tenant defaults on a loan for improvements. This means that the property deed can be used as collateral in the event of a default. Landlords may favour subordinated leases as they can negotiate higher rent and benefit from any increase in property value due to the tenant's improvements. However, this additional risk may discourage lenders from extending loans for tenant improvements.
Unsubordinated ground leases offer more protection for the landlord as they retain top priority. This prevents the tenant's lenders from foreclosing on the land in case of default, but it may result in lower rent due to the reduced risk. Each type of ground lease offers a different approach to balancing risk, potential property enhancement, and rent amount, and it is important for investors and business owners to understand the nuances of these agreements before entering into a contract.
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The benefits of leasing
Hobby Lobby, an American retail company, typically rents large retail spaces in mid- to high-income suburban areas. This strategy allows the company to save 50-70% compared to constructing a new space, giving it a competitive advantage in the arts and crafts industry.
Leasing offers several benefits for businesses:
More Options and Flexibility
Leasing provides businesses with more options as, in certain markets, more properties are available to lease than to purchase. It also offers greater flexibility for businesses that may need to contract, expand or relocate in the future.
Lower Costs and Better Cash Flow
Leasing typically requires less cash upfront than buying, allowing businesses to maintain a healthier cash flow and preserve their liquid cash reserves. This can help businesses avoid taking on debt and may leave them with more funds to invest in products, services or additional locations.
Lower Risks
Leasing can lower the risks associated with ownership, such as depreciation, obsolescence, or market changes. Lessors often assume some of these risks, providing renters with greater security and stability.
Tax Benefits
Rental charges are typically included in operational expenditures, which can help reduce a company's taxable income. Certain leasing agreements also offer additional tax benefits, such as removing financing from the balance sheet or accelerating depreciation.
Simplified Asset Management
Leasing enables companies to manage their assets more effectively. At the end of the lease, they can simply update, replace, or dispose of the assets, avoiding the trouble and costs of ownership.
Faster Approval
Lease financing often offers a quicker approval process compared to other funding options, making it more accessible for new businesses that may struggle to secure loans or face higher interest rates.
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Frequently asked questions
All Hobby Lobby stores are owned and operated by the company. However, the company typically seeks to rent big-box facilities, such as previously occupied supermarkets or hardware stores, instead of constructing new retail spaces.
By renting existing buildings, Hobby Lobby saves 50-70% on operating costs compared to building new retail spaces. This strategy is critical to the company's competitive advantage in the arts and crafts industry.
Hobby Lobby has an aggressive expansion model, allowing it to take advantage of real estate deals and gain buying power in the market. The company typically looks for new locations in mid- to high-income areas.
