Investors looking for gains in commercial real estate have been left perplexed as the ongoing global pandemic upends the sector. As traditional retail, offices and apartments crumble, the humble strip mall, epicenter of community shopping, is proving its enduring value to neighbors and investors.
Changing buying habits have changed investment strategies in the real estate sector. As more goods are sold online, the physical footprint of stores is changing. Understanding what is being sold online is key to understanding the future of physical retail. Fashion, technology and books are among the most common items purchased online. As a result, malls dependent on department stores, clothing boutiques and anchor tenants like Best Buy or Barnes & Noble have struggled. Tenants of strip malls are particularly well positioned with respect to e-commerce. Your typical mall around the corner offers local restaurants, beauty needs, financial services, gyms and medical facilities, none of which can be purchased online.
Green Street’s monthly commercial property values report shows community shopping centers rose 14% in August and 25% on the year. The value of shopping centers increased by 6% compared to pre-pandemic levels. There may not be any glitz or glamor in neighborhood malls, but they are the backbone of many communities. The value of strip mall real estate is supported by its public good for the area it serves. Giving nearby residents access to dry cleaning, a quick coffee, a haircut, yoga classes, or an ice cream cone increases local investment in the community, generating tax revenue and job growth in your own neighborhood. Amazon isn’t going to sponsor a local little league team, but the local Italian joint might.
“There’s no proxy for this little mall, this little space to make a sandwich and bring it to someone, for someone who walks in and cuts their hair. Until we have a computer mouse that cuts our hair or 3D printers that make burgers, you still need those neighborhood malls,” said Todd Laurie, executive vice president of Fund Services. and partner at Baceline Investments on a recent episode of The Motley. Crazy live show.
The rapidly changing nature of the retail industry adapting to e-commerce means that strip malls are being transformed into “lifestyle centres”, a term coined by the ICSC. Lifestyle centers are typically suburban commercial developments in upscale neighborhoods with specialty stores, restaurants, and upscale national chain entertainment. Many have multi-family attached, some even have hotels.
Ultimately, these centers are just another way to solve the real estate puzzle. The stores may be upmarket and the overall development denser, but at their core they still provide the same basic services nearby shoppers want they can’t get online. The ICSC estimates that there are nearly 450 open lifestyle centers in the United States. These small malls are an answer to the questions that plague mall owners. Instead of boring, cookie-cutter national chain stores selling products spread across cohesive interior spaces, local lifestyle centers offer a more tailored mix of services in a more intimate community setting.
Internet-resistant retailers can help strip malls and lifestyle centers protect their value, but their location is what creates most of the value itself. Having the right business doesn’t matter if there’s no foot or car traffic to support them. The best strip malls are those located at key intersections. Convenience is of the utmost importance. Retail studies have shown that most spending happens close to home. “Near Me” is among the top online search modifiers year after year. This is only gaining in relevance as remote work trends continue. Without a route to more heavily commercialized areas of the city, local strip malls see more purchases. Changing workforce travel patterns mean that purchasing habits are changing in kind. There may be fewer morning stops for a bite to eat at the bakery, but the lunch business is picking up. The pain for retailers in central business districts is the gain for retailers closer to home.
Buyers always spend a lot, it’s where they spend that changes. Retail sales are expected to rise nearly 14% this year, according to the National Retail Federation. The estimate has been revised up from the 6% growth predicted just six months ago. Grocery stores in particular have bolstered strip malls. More than 2,500 new grocery stores over 5,000 square feet have opened in the past five years, according to data from the CoStar Group. The pandemic has caused mall REITs to do better than ever. The Hoya Capital Shopping Center REIT Index, which tracks the 17 largest outdoor retail REITs, is up 48% this year, pushing many REITs above pre-pandemic highs. Perhaps most impressively, REITs posted 22% growth in same-store NOI. Shoppers don’t just use local malls more, they spend more when they do. Occupancy rates are up and rental spreads remain positive.
It’s no surprise that smaller, more community-oriented malls have been better able to adapt to community needs. Geographic proximity and personalized services that reflect the needs of the surrounding region have been a winning formula for decades. It doesn’t take fancy finishes, new developments or experiential retail to increase the value of strip malls. They may not be glamorous, but strip malls have long been one of the most successful in the retail industry. The only leading segment of strip malls is high street retail.
It is important not to put retail in the same basket. Traditional malls have been battered during the pandemic, putting more nails in the coffins of many. Headlines about struggling big retailers believe retail spending is rising. The story of retail has always been one of evolution. Nowhere is it easier to scale and adapt than in your local mall. Every business may face different prospects for their goods or services, but the value of their real estate is set. Blockbuster may have disappeared from our neighborhoods, but Blockbuster’s bankruptcy did not sink the malls. The owners have adapted and filled the space with new tenants, meeting the changing needs of local residents. Strip malls, as boring and dull as they are, are personal and important to the residents around them, making their value resilient.