Ugly Duckling Turns Golden Goose As Strip Malls Enjoy Major Image Makeover

Strip malls were once the plain-Jane stepsisters of the retail world, scorned as charmless eyesores that drew traffic away from traditional business districts, had volatile tenant rosters and offered some nasty environmental impacts to boot, like promoting the use of cars.

Now the sector is in the middle of a glow-up, far outdoing its more well-regarded shopping mall siblings for foot traffic, attracting new investor interest and, according to one of strip malls’ most CRE-famous advocates, enjoying the “hottest leasing market that we’ve ever seen.”

It doesn't hurt that strip mall businesses are largely online shopping-proof as well. 

“Amazon doesn't do manicures yet,” The Chicago Trend Corp. co-founder and CEO Lyneir Richardson said.

Trips to strip centers were up 18% in 2023 compared to data from before the pandemic, according to analytics company RetailStat, besting indoor shopping malls by a big margin.

And rents are on the rise. The nation's nearly 69,000 strip malls, typically centers without an anchor or anchored by a convenience store, saw nearly 3% asking rent growth year-over-year in Q3 and had the highest leasing rate of available space among all shopping centers at almost 46%, according to the latest retail outlook from JLL.

Strip malls also outperformed all other shopping centers with around 1M SF of absorption versus negative absorption for the segment as a whole through the first nine months of the year, JLL said. Strip centers have the second-lowest vacancy rate among retail types behind power centers, according to the report.

Retailers and investors are taking notice. Despite closing down a swath of large department stores this year, Macy's has committed to opening 30 small-format strip mall locations through 2026 to be closer to suburban customers. The nation's fastest-growing retailers, including Dollar General, Five Below and T.J. Maxx, have also doubled down on the centers.

Meanwhile, investor interest is piquing, with demand outstripping supply by a healthy margin, according to Matthews, which called unanchored strip centers “a compelling opportunity to broaden investment options.” Just this week, KPR Centers announced it acquired the 230K SF Eagle Plaza in Voorhees, New Jersey, for $41.7M, $12M more than the center sold it for just two years ago.

There wasn’t much mainstream attention on strip malls before the pandemic, according to TownCentre Capital Founder Don Tepman, who has been focused on the small asset class for 22 years and built a reputation as one of their biggest proponents on X as StripMallGuy. 

“They're a hot commodity,” Tepman said. “If you look at every market in the country, literally every suburb, you talk to the leasing folks, they'll say, ‘This is the hottest leasing market that we've ever seen.’ Everywhere, middle of nowhere, doesn't matter where it is.”

Many once left strip malls for dead, thinking Amazon would drive more small retailers out of business, according to Bayport Funding CEO Marcia Kaufman, a New York-based bridge lender who operates on the East Coast and expanded into the Dallas-Fort Worth market earlier this year.

“I am seeing a little bit of a resurgence in that investment,” Marcia Kaufman said of strip malls. “The reports of the strip mall’s death have been overly exaggerated.”

Strip malls build a lot of loyalty in the communities they serve, Tepman said.

“If you grew up in the suburbs, your life was centered around the strip mall,” Tepman said. “Most people can picture the spot that they grew up going to. For me, it was a Jamba Juice and it was Pizza Hut.”

Strip malls have benefited from tailwinds from the pandemic. People who work from home now utilize local barbers and restaurants instead of the ones near their office.

That’s one of the reasons Tepman is a big fan of the assets and the mom-and-pop businesses they house.

“Wall Street discounts them a little bit when it comes to the asset value, but I think that's a mistake in many ways,” he said.

Local owners of strip mall businesses do whatever it takes to make them successful, LanCarte Commercial Managing Director Paul Tesdal said.

“That's their livelihood, so if they're going to sign a lease, they're going to go into it and execute and work harder … because that's their sole source of income,” Tesdal said. “There's just a little bit more of [the] American dream in that type of product.”

The asset class has become more popular over the last several years because it provides direct access to consumers, MainStreet Partners co-founder Mitchell Parker said. Founded earlier this year, Parker’s company focuses on value-add retail with an emphasis on strip centers in the Dallas-Fort Woth area.

That consumer access has led to a rise in medical-related businesses popping up in strip malls. Parker said dentists, pediatricians and urgent cares are a great compliment to the traditional retailers found in the tenant mix.

“They want a lot of the same things retail tenants look for, which is good access, lots of population, a lot of traffic by them [and] good parking,” Parker said. “It's a natural fit for them to go into some of these strip centers and from a landlord perspective, they're great tenants to have … because they don't often look to move.”

For investors, strip malls can often be scooped up as a value-add play at a cheaper rate than a power center, Tepman said.

“Everything is cyclical, but what I like about the mom-and-pop model is that it's pretty immune to e-commerce,” Tepman said. “That's because the services and niche businesses that occupy it aren’t really impacted by online shopping.”

Strip malls in middle-income and affluent areas are attracting most of the investor attention, Tesdal said. Low-income areas have more strip malls with pawn shops, liquor stores and vape outlets, and those are less likely to garner investors looking to spruce them up.

The Chicago Trend Corp. owns six strip malls in majority-Black communities, including four in Chicago and two in Baltimore. The company intends to renovate them and turn them into neighborhood assets, Richardson said, adding it is part of the company's mission to strengthen commercial corridors in low- and moderate-income communities.

And a strip mall refresh can lead to neighborhood vibrancy and revitalization, Richardson said.

“The strip center in many communities is your first impression of the neighborhood,” Richardson said. “Doing this right can jump-start other commercial corridor development [and] can encourage other people to renovate.”

When strip malls don’t get that level of investment, they can devolve into community blights. 

“Making those investments is going to attract better tenants [and] allow them to charge sufficient rents to be able to be profitable,” Richardson said.

Rose City Partners is a family-owned development firm that builds strip malls in the DFW area. They work with emerging cities and economic development corporations to build centers that will attract new businesses to the area.

“There's obviously more excitement for things like a new grocery store and some of the bigger users, but for a little 10K SF strip center, just having a having a [restaurant with a] nice patio is often something that gets residents excited,” Rose City Partners CEO Tyler Alley said. 

Throughout most of suburban America, consumers are stuck with the existing footprint of strip centers, Tepman said. Most were built anywhere from 40 to 70 years ago, and the cost of construction has surpassed the point where it’s feasible to rebuild them.

“Part of the problem is you've got owners that are seeing such a low vacancy rate [that] putting money into facelifting the building, enhancing the lighting, making them nice … it's not justified,” Tepman said. “95% of these properties are just locally owned by mom and pop. They're not going to go get ahead of the fact that the facade’s looking old.”

Though construction costs don’t make building new strip malls feasible right now in most of the country, Tesdal said he’ll be watching the asset class over the next decade. A future dip in construction costs could lead to more of these consistent moneymakers being built.

Land prices and elevated interest rates also tend to push needed retail rents too high for the deal to pencil, Alley said. In other asset classes, there would be a lot more new construction because of the leasing demand and low vacancy rates in the sector.

“That's a unique characteristic of retail, and it makes me think that the vacancy [rate] can stay low longer than we'd expect,” Alley said. “The ones who choose to develop [could] be rewarded, but these cycles can change at a moment's notice.”

Thanks to the tailwinds mom-and-pop and service-oriented businesses enjoy, strip malls could be in for a renaissance from investors like TownCentre Capital. New lighted signage, facade refreshes and cosmetic touch-ups go a long way toward revitalization, Tepman said. 

“Paint has the biggest return of investment in real estate,” Tepman said. “It's simply amazing what a more modern paint job will do.”