Retailers of all sizes have been affected by the explosive growth of e-commerce, especially chain retail stores. The closure of anchor stores has dragged down surrounding businesses, sparking a major decline in large shopping malls. This has led many small businesses to turn to retail strip malls in urban and suburban areas, creating new opportunities for real estate investors.
The traditional retail strip mall can be an excellent investment as part of a diversified portfolio, as long as you know what to look for and are willing to invest in property improvements. If you take the time to learn more about the strip mall you’re investing in and the surrounding market, you can take even a struggling location and make it into a great success.
Are Strip Malls a Good Investment?
There are many advantages to investing in strip malls. They can provide steady income over many years, and choosing a diverse set of service-oriented businesses can mitigate risk exposure. One of the key advantages to strip malls is the relative reliability of tenants, compared to residential tenants. Commercial tenants often sign multi-year leases that allow you to better guarantee the profitability of your investment.
As one of the property types that has withstood the challenges of the pandemic, strip malls remain a good investment opportunity. With larger malls closing or reimagining themselves as destinations providing luxurious shopping experiences, smaller businesses that would struggle to compete in a mall find the visibility and potential traffic offered by a well-positioned strip mall to be very lucrative.
What to Consider When Investing in Strip Malls
If you are thinking of investing in strip malls, it pays to do some research. Consider these factors when evaluating your options.
Location, Location, Location
Location is one of the most important aspects of any retail strip mall. A densely populated urban or suburban area is the ideal location for a successful strip mall. Look at the local demographics of the surrounding area to ensure that there’s a market to support it. Ensure it’s in a safe neighborhood, with low unemployment and a high median income. The most successful locations tend to have a lot of foot or vehicle traffic on adjacent streets or intersections.
Accessibility is also critical for a strip mall’s success. You can be planted firmly in the middle of a great neighborhood, but limited parking space or difficult turns off the street can turn people away from visiting a store or restaurant. If these challenges are present, some businesses might look for space elsewhere.
Many investors focus on existing locations when considering investment opportunities. Older strip malls might have maintenance issues or need upgrades, but even these locations can be worthy investments. Of course, the older a building is, the more likely it is that you’ll need to hire a contractor to upgrade roofing, electrical wiring, or HVAC systems. You may also need to invest in improving the aesthetics of the property to appeal to the customer base you want to attract.
Having the right businesses in the strip mall is a key factor in driving its success. A strip mall that provides an array of services that the local customer base wants in a single convenient location will outperform those that fail to cater to this base. The ability to get multiple errands done in a single trip, saving tens of minutes or even hours on the road, is why massive shopping malls were such dominant retail destinations in the past. It’s also something that defines successful strip malls today, even if the needs of shoppers have changed.
Many successful strip malls are anchored by supermarkets, high-end movie theaters, and fitness centers. These businesses are hubs that actively attract people, whether it’s to run errands, do self-care, or be entertained. Secondary businesses that lease adjacent and nearby units can benefit from the traffic provided by a solid anchor. Service-oriented businesses that fill out the surrounding spaces enhance the overall convenience that the strip mall offers. Put simply, having a diverse set of businesses that complement one another will make strip malls far more attractive and likely to succeed in the long term.
Past Successes and Failures
If you’re investing in a troubled location, learn about which businesses failed to work out and why. Research what types of stores have historically suffered in the area to filter out potential tenants who might be a poor fit for the location. Were they redundant when compared with other businesses in the area? Were the services something that local residents wanted? To get answers, ask existing tenants what businesses have tended to thrive, which may be entering a slump, and what led to the failure of those that no longer exist.
Strip Mall Financing with Socotra Capital
Are strip malls a good investment? If you invest in the right location, attract the right businesses, and are responsive to issues with the property as they arise, a strip mall can be a successful and consistently profitable addition to your commercial real estate portfolio.
If you find an attractive opportunity to invest in a strip mall, you may need to act quickly. Socotra Capital provides fast, flexible financing options for real estate investors of all types. For more information about how to fund investment opportunities, read, How to Grow a Passive Income Portfolio in Today's Market.