Strip Malls - Hottest Thing in Real Estate

In a time when we seem to hear nothing but negativity about all things commercial real estate, it’s really great to hear about a success story.  In this case, it comes from a place that may surprise you…it’s the strip mall around the corner from your house.  Historically, this has been home to countless retail businesses that seem to turnover every few years.  Frankly, this space has never gotten the respect it probably deserves.  But if COVID hurt central business district office towers and their related retail establishments, it’s vastly improved prospects for the suburban strip mall.  

Some of the success is intuitive.  We used to go out to lunch in the city.  Meet for coffee at the corner shop and entertain clients at the high-end steak house.  But with many folks working from home or at least in a hybrid environment, the traffic has moved to the Cava or Chipotle in the local strip.  With this in mind, it’s not surprising that occupancy at strip mall REITs currently sits at 95.3%.  For some context, it’s been 8 years since they’ve had that level of success, and unless we have a resurgence in office a lot early than anyone expects, this high level of occupancy will likely persist.  

The tenants of strip malls have also been surprisingly resilient.  The highly prognosticated death of brick-and-mortar retail has been hanging over the head of these properties for years.  While the pandemic has certainly helped, what is also interesting is that e-commerce has not destroyed this real estate sector.  Certainly, e-commerce continues to get bigger, but the tenants of these buildings also continue to innovate. 

Starting with the large anchor tenants, stores like Best Buy and TJ Maxx continue to thrive.  In the case of Best Buy, they began offering home services for high-tech problems (the Geek Squad and Total Tech Support) to stay relevant where Circuit City and others failed.  TJ Maxx on the other hand, made the hunt for a bargain a reason to skip on-line shopping. 

Smaller tenants are generally focused services and other businesses that require more personal touch.  In either case, innovation has driven a more resilient retail tenant to the strip malls, and the pandemic has bolstered their results. 

Source: The Wall Street Journal