Strip Mall Apocalypse ?

Question

Joel Owens · Answer

Retail sales are up over 6% and going STRONG. I am staying busy around the clock with clients wanting to buy up retail properties like crazy.

Most strip center tenants today are experiential / service. I have answered this question many times on here in detail. When evaluating a retail center for a client I look at if a tenant type is at risk or might go online in the next 5 years with their business model. If so I analyze are they currently paying at, below, or above market rents?

If they are paying low rent it can be a blessing for them to go out assuming you bought in a good market. There are areas in some mid-belt states and cold belt states that were over retailed to begin with and with net migration moving away to cold belt states can leave an oversupply of available space to rent even if not much new development is underway.

One tip I use to do with developers is drive around depending on rural, suburban, urban core a certain mile ring radius and see what occupancy looks like and locations for existing properties. Brand new development being built out of the ground the property might be already fully 100% leased so not the same as looking at existing buildings and counting empty spaces.

Jason Carter · Answer

I'm simply echoing @Joel Owens here but Nail Salons, Hair salons, Dry Cleaners, Liquor Stores, Subway sandwiches and similar. There are many services that will never go online.

And guess what Amazon is investing in?

http://time.com/5401213/amazon-stores/

We've been shopping for another strip center this year and the competition is fierce right now.

Ash Patel · Answer

One of the most underrated RE classes is class B retail/industrial/office.  Unlike MF investors who chase class B/C apt buildings, there are so few investors in the class B/C retail game.  I love buying the mom and pop strip malls in neighborhood locations.  These are often purchased at 40% cash on cash return with massive upside and minimal downside.  I think covid has kept people from going to city centers and drawn them to neighborhood retail 1-5 miles from home.  Think of th essential services that people still go to stores for.  Hair/nail/insurance/restaurants/massage/tutoring etc.  Class A office buildings have huge vacancies while my class B office buildings have a waiting list of people wanting to get out of their house or take the leap with their business.

Jameson Sullivan · Answer

Echoing the last two comments, there may be a shift in the tenant mix going forward as more things move online. However service based businesses, by design, will never be able to move online and will continue to draw traffic to these centers. Contrary to popular rhetoric, retail is not dying, it is simply changing as does everything.

Ben Barrameda · Answer

Hello Ron,  I just joined and saw your post. The whole online purchasing will be changing soon for several reasons that are now converging. (1) the new democratic administration will be taxing online sales in the very near future or remove tax breaks that will force the Amazons and online stores to raise their fees/prices. Many states are already taxing online sales. And more states are jumping in for the sales tax. (2) postal delivery costs have gone up a lot and will continue to rise; (3) slowing delivery - those one day delivery will never come back even after the pandemic. For most smaller items it won't be worth waiting 5 days for your item.

With all of that, the brick and mortar will start coming back. Maybe not the big boxes but surely some that are smaller national and local.

With that in mind, I am gearing up to expand my one-store unit. I will be posting more from here on. Maybe not specifically on this site but wherever the topic is relevant. Also interesting is the glut in vacancies due to the pandemic which may be a buying opportunity (I know everyone will be yelling No!)

Ben from Somerset County, New Jersey

Ben Barrameda · Answer

Thank you Steve Morris for your post. Apartments were my target before but with the pandemic, I'm glad I didn't land any apartments. Tough to collect rent from people already suffering from the Covid 19 or from lack of employment, specially in my state of New Jersey. Business as tenants are also tough during the pandemic but I can see some trend to new businesses coming up while old ones close. I suspect that businesses will bounce up quickly once the lockdown is over. Apartments will also boom here in New Jersey as more people flee Manhattan and NY City.  Many large businesses in Manhattan are not asking their employees to come back to work in the city and instead allow remote work. And even with all the vacancy signs of commercial buildings, the prices have not really gone down much.

I'm pooling my resources to buy the 3 acre commercial land next to our store and add more rentable stores to draw foot traffic to our store while earning some rent. There are many other opportunities nearby but it would be great to nail the one right beside us. Resources are always limited and one has to stay focused on your goal.

Also, the one thing I learned when we were searching to acquire a retail building was that all the towns around us have already locked in their zoning and all the retail zones spaces are either owned by big malls or grandfathered small business. There are not many affordable retail spaces around us. A person interested in starting a small business will have to rent from the established strip malls and that would just put them under in no time. Retail Zoning, It's like a liquor license or a taxi cab medallion in NYC that's worth a lot by itself. Land for apartments are more available although one may argue that the prime spots in town are all overpriced.

Thanks for your post.

John Yarenis · Answer

@Nathan Reeve

Thanks for mentioning the show.  I listen to many podcasts; from the one here to Rod Khleif’s to other.  But they don’t focus on the one property type I’m involved with.

I’ll find this one and start listening!

Steve Morris · Answer

Do apartments, but have a couple of clients that own strip malls.

First, any type of property can get overbuilt, however, both guys are happy because:

1) High traffic count and street egress and parking (kinda tough getting all of that in one place)

2) Site exposure - You want ALL the storefronts facing the street and NOT a mall that is perpendicular (ie the short end) facing the street

3) Get a good anchor (like major cell phone guys) that bring a lot of traffic to the mini-mart since they're there already

4) Try to avoid some businesses like small specialty groceries by first-timers that stop paying rent after 3 months since they have no clue on how to run a store.

Strip Mall Apocalypse ?

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