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The Pandemic Has Shopping Center REITs Doing Better Than Ever

Investors looking for gains in commercial real estate have been left scratching their heads as the ongoing global pandemic turns the sector upside down. As traditional retail, offices, and apartments falter, the humble strip mall, an epicenter of community shopping, is proving its lasting value to neighbors and investors alike. 

Changing shopping habits have shifted investment strategies in the real estate sector. As more goods are sold online, physical store footprints are changing. Understanding what is being sold online is the key to understanding the future of brick-and-mortar retail. Fashion, technology, and books are among the most common items bought online. It follows then that malls relying on department stores, clothing boutiques, and anchor tenants like Best Buy or Barnes & Noble have struggled. Strip malls’ tenants are uniquely positioned against e-commerce. Your typical strip mall around the corner features local dining, beauty needs, financial services, gyms, and medical facilities, none of which can be bought online. 

Green Street’s monthly report on commercial property values shows community shopping centers rose 14 percent in the month of August and up 25 percent in the year. The value of strip malls is up 6 percent over pre-pandemic levels. There may not be any glitz or glamour to neighborhood shopping centers, but they form the backbone of many communities. The value of strip mall real estate is backed by its public good to the area its serves. Giving nearby residents access to dry cleaning, a quick coffee, a haircut, yoga classes, or an ice cream cone expands local investment in the community, driving tax revenue and job growth in your own neighborhood. Amazon isn’t going to sponsor a local little league team, but the local Italian joint might. 

“There is no proxy for that small shopping center, that small space for making a sandwich and getting that to somebody, for somebody coming in and cutting their hair. Until we have a computer mouse that will cut our hair or 3D printers that spin out hamburgers, you still need these neighborhood shopping centers,” Todd Laurie, executive vice president of Fund Services and partner at Baceline Investments said on a recent episode of The Motley Fool’s live show

The rapidly changing nature of the retail industry adapting to e-commerce means strip malls are being upgraded to ‘lifestyle centers,’ a term coined by ICSC. Lifestyle centers are typically suburban retail developments in upscale neighborhoods with high-end national chain specialty stores, dining, and entertainment. Many have multifamily attached, some even have hotels. 

Ultimately these centers are just another way to arrange the real estate puzzle. The stores may be high-end and the development overall denser, but at their core, they’re still providing the same basic services nearby shoppers want that they can’t get online. ICSC estimates there are nearly 450 lifestyle centers open across the United States. These smaller shopping centers are an answer to questions that have plagued mall owners. Instead of boring, cookie-cutter national chain stores selling products spread across homogeneous indoor spaces, local lifestyle centers offer a more tailored mix of services in a more intimate, communal setting. 

Internet-resistant retailers can help strip malls and lifestyle centers protect their value but their location is what creates most of the value itself. Having the right business doesn’t matter if it doesn’t have the foot or vehicle traffic to support them. The best strip malls are the ones at key intersections. Convenience is of utmost importance. Retail studies have shown most spending happens close to home. “Near me” is among the top online search modifiers year after year. That is only becoming more relevant as remote work trends continue. Without a commute into more heavily commercialized areas of town, local strip malls are seeing more purchasing. Changing commute patterns for workforces means shopping patterns shift in kind. There may be fewer morning stops for getting a bite at the bakery but lunch activity is picking up. The pain for retailers in central business districts is the gain of retailers near home. 

Shoppers are still spending plenty, where they’re spending is what is changing. Retail sales are expected to grow by nearly 14 percent this year, according to the National Retail Federation. The estimate was revised up from the 6 percent growth predicted just six months ago. Grocery stores in particular have bolstered strip malls. More than 2,500 new grocery stores larger than 5,000 square feet have opened in the last five years, according to data from CoStar Group. The pandemic has shopping center REITs doing better than ever. The Hoya Capital Shopping Center REIT Index, tracking the largest 17 open-air shopping REITs, is up 48 percent this year pushing many of the REITs above pre-pandemic highs. Perhaps most impressive, the REITs posted 22 percent growth in same-store NOI. Shoppers aren’t just using local shopping centers more, they’re spending more when they do. Occupancy rates are up and leasing spreads remain positive to boot. 

It isn’t surprising that smaller, more community-focused shopping centers have been better able to adapt to community needs. Geographic proximity and personalized services that reflect the needs of the surrounding area have been a winning formula for decades. It doesn’t take fancy finishes, new developments, or experiential retail to drive the value of strip malls. They may not be glamorous, but strip malls have long been one of the retail sector’s best performers. The only segment topping inline strip centers is high-street retail.  

It’s important not to lump retail into the same basket. Traditional malls have taken a beating during the pandemic, putting more nails into many’s coffins. Headlines about major retailers struggling believe the fact that retail spending is surging. Retail’s story has always been one of evolution. Nowhere is it easier to evolve and adapt than at your local strip mall. Each business may face different prospects for their goods or services, but the value of their real estate is definite. Blockbuster may be gone from our neighborhoods, but Blockbuster’s bankruptcy didn’t sink strip malls. Owners adapted and filled the space with new tenants, meeting the changing needs of local residents. Strip malls, as boring and drab as they may be, are personal and important to the residents around them, making their value resilient.

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