Why Strip Centers Outstrip The Competition

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After nearly three decades in brokerage, touring over 1,000 retail centers, driving hundreds of markets, and talking with both mom & pop tenants, mom & pop owners, sophisticated individual owners, corporate tenants, and institutional owners, one thing has become more and more clear: strip centers are some of the most durable and flexible assets in commercial real estate. They do not always get the same buzz as single-tenant net lease properties, industrial buildings, or multi-family properties but when you truly understand how retail works, it is easy to see why investors and brokers have been gravitating toward them at an increasing pace.

The fundamentals are simple. A good strip center is highly visible, easy to access, has ample parking, located on a strong corner on a busy street, and well positioned to serve the trade area in which it is located. When it checks those boxes, the center becomes a reliable source of stable and growing income for the owner.

Here is what I have consistently seen from years of selling and owning these deals:

Diversified Income Means Stability

Generally speaking, no one tenant can make or break a strip center investment. The risk is spread across the success of multiple tenants. When one tenant leaves, you do not lose the entire income stream. Sure, there will be turnover. The turnover will equal downtime and leasing costs, but the turnover is generally not catastrophic and usually ends up being a net benefit in the form of higher rent and an upgraded tenant mix. Diversification creates stability and has made strip centers a cornerstone investment for many owners.

Replacement Costs Make Existing Centers More Valuable

New construction is expensive. In most quality markets, it is nearly impossible to make new strip center development pencil. Rising land prices, increasing costs of materials, and higher labor costs, coupled with extended and more difficult entitlement hurdles have led to a surge in ground up development costs. Higher costs mean higher rents. Higher rents mean fewer and fewer tenants can afford to stay in business. This is why existing centers, especially those with at or below market rents, are so attractive. Owners can capture rent growth over time with built-in escalations and renewals, and get in at a basis that is far lower (safer) than buying newly constructed properties.

I have seen countless landlords purchase retail centers with below-market leases and, over the course of a few years, re-tenant and raise rents significantly, creating millions in capitalized value - all while cash flowing along the way. That kind of upside is hard to replicate elsewhere.

Small Suites = Big Opportunity

Smaller suites (typically 800 to 1,500 square feet) are another source of stability and can generate strong rental growth. For tenants, the total occupancy costs are manageable. For landlords, the demand for those spaces is constant. There are many more tenants who can fill a 1,000 square foot space than there are to fill a 5,000 square foot space. Some of the strongest operators in the business, including fast-casual restaurants, medical / dental users, wellness and beauty operators, boutique fitness studios, etc., generate incredible sales volumes out of these smaller suites.

One of the original Dave’s Hot Chicken locations in Hollywood, CA was rumored to be doing $5M in sales out of a 1,000 square foot suite. The tenant could have signed that lease at $48 PSF / year NNN (total occupancy cost $60,000 / year including $12 PSF / year NNN charges) and would easily be able to afford the rent. This tenant will have no problem paying a 4% - 5% annual increase. When the lease comes up for renewal, the landlord could ask for double the base rent (total occupancy cost of $108,000 / year - $96 PSF / year + $12 PSF / year NNN), and Dave’s could easily afford this increased rent. At a 5.0% CAP Rate, that $48 of additional rent equates to an increase in value of $960,000. That’s landlord security. That’s income growth. That’s asset value growth.

Consumer Convenience Wins Every Time

Strip centers thrive on daily needs tenants. Coffee shops, dry cleaners, nail salons, takeout restaurants, and medical / dental offices are not luxury stops; they are routine. When tenants fit into people’s weekly or even daily schedules, traffic becomes repetitive and predictable.

Everyone has been to their local neighborhood center where the mom & pop tenants (nail salon, Italian restaurant, convenience store, etc.) are consistently busy. Not because they were big name brands, but because they were integral to the rhythm of the neighborhood. That is the real magic of strip centers: the occupants are embedded in the consumer’s lifestyle.

Internet-Resistant Tenants

Another key feature that has opened the eyes of the broader investment community to strip center investments is that the tenant uses are often internet resistant. If the destruction of several stalwart retail categories taught us anything, it is that tenant uses are crucial to the health and sustainability of a retail property. The internet created mass destruction in the big box category and the remains can still be seen in anchored retail properties across America.

You can’t get your hair or nails done online. You can’t do laundry on the internet. You can’t get gas on the internet. You can’t get your car washed online. You can’t change your tires or get an oil change on the internet. You can’t get your teeth cleaned or a cavity filled online. You can’t have your dog or cat treated by a vet on the internet.

These uses are not going anywhere. This creates a very strong incentive for these types of tenants to remain in the best-located retail centers. 

These “internet-resistant” tenants are the backbone of strip center investments.

Flexibility in Leasing

Flexibility is one of the biggest advantages strip centers have over other property types. If you lose a 1,200 square foot tenant, you can often backfill the space in 60 to 90 days. Compare that to a dark big box that could sit empty for years and bring with it millions of dollars in costs between loss of rent, debt service and expense carry, leasing commissions, and tenant improvement contributions. This doesn’t happen with small suites.

This leasing agility enables owners to adapt to changing consumer trends, test new concepts, and maintain high occupancy. In a world where retail is constantly evolving, that kind of adaptability is priceless.

The Public Market Example: Curbline Properties

Even the public markets have started to validate what brokers have long known. Curbline Properties (NYSE: CURB) is the first REIT built entirely around strip centers. Their focus is on affluent suburbs and high-traffic corridors, where the fundamentals of visibility, convenience, and small-suite tenants are strongest.

Their Q2 numbers speak for themselves: 96% leased occupancy, same property year over year NOI growth north of 6%, and rental increases of 8.5% on renewals and 15% on new leases. They have acquired nearly $900M in strip centers over the past year, demonstrating significant institutional demand for this asset class. For brokers, it is confirmation that what we have been seeing on the ground for years also resonates at the highest levels of the capital markets.

Valuations and CAP Rates

Based on the asset characteristics written above and the growing appetite for retail strip centers, we expect to see continued CAP Rate compression in this segment. Traditionally, multi-tenant retail has traded at higher CAP Rates than single-tenant assets. We do not expect to see CAP Rates reach parity with single-tenant properties; however, we do believe the spreads will come closer together than they have been in many years. The lower the price point, the more aggressive the CAP Rate will be. We recently saw a multi-tenant real center in Orange County sell for a 4.84% CAP Rate. That’s quite aggressive considering current interest rates.

Closing Thoughts: Savvy Owners and Data Drive Value

What I have seen is that savvy owners can make strip centers shine. While some view these as tired eyesores, the savvy investor sees a goldmine. Behind the scenes, the smartest owners and brokers are doing more than collecting rent; they are collecting data.

They know what tenants in other trade area centers are paying. They have data on when leases are expiring. They know which trade areas are underserved. This knowledge allows them to underwrite risk and upside potential more accurately. They are more informed as to when to let a tenant go for a better opportunity and when to retain an existing tenant. They understand how to fill vacancies quickly and construct the most synergistic tenant mixes.

That is the philosophy behind DealGround. We built it to give brokers the same edge that the wisest owners already use: fast access to reliable market data, enabling them to make highly informed decisions. Because in strip center investing, just like in brokerage, if you know the data, you do not just react to the market, you create opportunity.