Strip Malls: The Least Glamorous Segment In Retail Is Among The Sector's Strongest Performers
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Retail real estate in 2017 can be best described in two words: “in flux.”
Vacancies across the nation have risen as big-box retailers and department stores announced closures and the construction of new product simultaneously slowed. But experts agree that retail real estate’s fundamentals remain strong. Mall operators continue to adapt to the changing landscape, and high-traffic, urban metro markets remain the best-performing in the sector.
Lost in the conversation about retail’s bifurcation is the health of the strip mall — the under-100K SF red-headed stepsibling to luxury retail and the shopping mall.
CBRE Senior Vice President Christian Williams said that the performance of inline strip centers is holding up exceptionally well, and is second to high street opportunities in performance.
The tenant mix in strip centers is a healthy mix of internet-resistant retailers and service-oriented tenants. Owners and managers of strip malls anchored by grocery stores are complementing their tenant mix with discount retailers, quick-service restaurant concepts, family entertainment options and smartphone shops. Strip malls are also benefiting from the decentralizing of medical campuses. As more hospital groups re-enter the neighborhoods where their patients live, outpatient clinics and specialized medical services such as physical therapy centers and MRI facilities have found homes in strip malls — a concept that Williams dubbed “medtail.”
CBRE Executive Vice President Richard Frolik adds that strip malls are increasingly popular with financial services firms, insurance companies and fitness retailers. With little new strip mall construction in progress, immediate demand from tenants has revitalized strip malls, especially those that were built 20 to 50 years ago.
“The populations around these centers have grown over that time, as well,” Frolik said.
Quantum Real Estate Advisors President Chad Firsel agrees that strip malls have become e-commerce-resistant, and that has been proven by the growing presence of service-oriented retailers like barbershops, beauty shops and nail salons that cannot be replaced by an online retailer.
“There is a transformation taking place and the majority of landlords and tenants are aware of consumer behavior patterns,” Firsel said.
Firsel said QSR restaurants are here to stay. Customers are more educated and health-conscious today, and the quality of food over the past decade has improved. More people are dining out more frequently these days, instead of cooking at home. Supermarkets have responded to the change in consumer habits, as well. Firsel said that prepared foods departments at grocery stores have grown exponentially over the past 20 years.
Williams said that other QSR trends have evolved in recent years. The gourmet burger craze of years past has died down and there are signs of a course correction coming to the wood-fired pizzeria concept.
“People keep inventing new concepts. Some last; others fizzle. Retail always evolves,” Williams said.
Another driver of strip mall demand is convenience. Frolik said that operators are responding to the demand for drive-thru retail concepts by developing outparcels for single tenant retailers. These command lucrative ground leases with long-term leases. Municipalities eager to see this redevelopment taking place within their borders are stepping up to the plate with incentives, in order to facilitate these projects.
Trends that Class-A mall operators have embraced are also trickling down to strip malls. Williams said that indoor children's playgrounds like bounce houses are backfilling smaller, vacant boxes within strip malls. Typically, these are between 2K SF and 3K SF.
Firsel said demand for strip mall space will increase as retail continues its transformation. However, he expects the number of players in soft goods like clothing and linens will continue to contract. And tertiary strip malls — those in far suburban areas with bad signage, accessibility and a parking ratio of less than 3:1, will be hard sells to tenants. Tertiary retailers will also feel the brunt from the contraction of hard goods retailers like electronics, sporting goods and appliance retailers. This will force operators to seek out better-located strip mall assets, leaving them scrambling to fill the bigger boxes within the tertiary centers.