With some publications heralding the return of the shopping mall to cultural prominence — whether via attending to the desires of Gen Z shoppers or through redevelopment beyond retail concerns — one thread appears to have been left somewhat unattended: the future of the humble strip mall, or open-air retail shopping center.
According to Business Insider, the strip mall is positioned for some sort of retail renaissance. The mixture of retail with other consumer destinations such as grocery stores and casual restaurants or sports bars bodes well for foot traffic, first and foremost.
As the Wall Street Journal reported, the most attractive strip malls from an investor perspective have a grocery store anchor as a primary long-term tenant. “Footfall to grocery stores was 12% higher in the third quarter of 2024 than it was during the same period of 2019, based on data from real-estate research firm Green Street,” the outlet noted.
Furthermore, the WSJ added that landlords are complementing grocery stores by renting to small retailers and independent businesses that offer services that are difficult or impossible for e-commerce competitors to replicate, including coffee shops, nail salons, medical centers, and yoga studios.
Institutional Investors Keen on Revitalizing the Strip Mall, Open-Air Shopping Center
With retail construction on something of a hiatus while new industrial warehouse construction ticks upward, existing retail space in locations formerly deemed unappealing or “unflashy” may be piquing interest with investors moving into 2025.
Making its biggest bet on retail in over a decade (since 2011, as the WSJ profiled), Blackstone purchased shopping center owner Retail Opportunity Investments in November to the tune of $4 billion — a deal that Bain Capital was reportedly also quite interested in. James Corl, head of private real estate for Cohen & Steers, spoke to this trend in a September 2024 blog post.
“Open-air shopping centers are the only major property type that is experiencing an acceleration in rental rate growth,” Corl wrote. “We believe that a durable acceleration in earnings growth combined with relatively high current yields will propel shopping center investment performance for some time; a reality that the market has yet to fully recognize.”
Business Insider noted that Retail Opportunity Investments owns about 90 shopping centers, with the majority having grocery stores acting as the primary anchor.
Stating that Cohen & Steers has been bullish on open-air retail in recent times, the WSJ quoted Corl as saying that “this is where America shops now” — a concise endorsement. The outlet, citing CBRE projections, suggested that a minimum of $10 billion in American open-air retail portfolios were set to change hands in 2025 alone.
“There are many open-air retail deals occurring with five to six banks actively bidding for the financing,” said Chris Decouflé, CBRE’s managing director of U.S. retail capital markets, per the WSJ. “Six months ago, there were zero banks playing unless deposits and guarantees were on the table.”
While Shopping Malls Remain Less Attractive, Possibilities for Growth Emerge
The bottom line concerning the cost of getting involved with shopping mall real estate continues to be a matter of concern for some, with air conditioning and tenant leverage over the signing of new leases being just two concerns conjured forth by the WSJ. Furthermore, malls are often populated by stores selling items of a discretionary nature — a category of consumer goods that has suffered greatly as cash-strapped consumers choose to curtail nonessential expenditures and “trade down” when it comes to preferred purchases versus necessities.
That being said, WSJ writer Carol Ryan was quick to point out a potential revitalization for mall real estate as well.
“However, malls also will become more attractive to private real-estate investors if vacancy rates continue to fall. Mall real-estate investment trusts were among the best performing real-estate stocks of 2024, according to Michael Goldsmith, an analyst at UBS. It is a sign that landlords at top quality malls are getting some power back in negotiations with tenants,” Ryan wrote.
With new building costs far outstripping current retail rents in strip malls or open-air retail centers (rents would have to increase by a whopping 65% in the top 50 U.S. markets, per Green Street data, for new retail construction to be a more attractive option), it seems that a renewed interest in the American strip mall is both warranted, and a likely eventuality, as far as investors, business owners, and consumers are concerned.