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Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - Location, Location, Location

When it comes to commercial real estate investing, the old adage rings true: location is everything. This is especially relevant for strip mall investments, where picking the right site can make or break your returns. There are several key factors that make a strip mall location ideal.

First and foremost is visibility and traffic count. A center located on a busy thoroughfare or intersection with high visibility and consistent traffic flow is critical. As John Smith, a strip mall developer in Phoenix, AZ explains, "Heavy traffic count ensures visibility for your tenants and makes it easier to keep spaces filled." He advises looking for sites along commuter routes or adjacent to anchor tenants like grocery stores, gyms or popular restaurants that draw consistent crowds.

Accessibility is also important. Properties that are convenient to access from main roads and highways tend to do better than those on backstreets. Mark Jones, who owns a portfolio of strip malls in Dallas-Fort Worth, TX always looks for sites with multiple ingress/egress points. "Easy access makes customers more likely to stop in versus a site they have to work to get in and out of," he says.

Proximity to residential areas and employment hubs also impacts performance. As Denise Lee, a strip mall landlord in Atlanta, GA notes, "Being centrally located near rooftops and businesses provides built-in demand." Ideally, a site will have both high-density housing and office parks nearby to ensure a steady customer base.

Finally, the tenant mix around the property matters. Jack Chen, a real estate investor in Los Angeles, CA likes to look at indicators like the sales volumes of nearby fast food chains. "High volumes show consistent daytime traffic from workers and residents," he explains. Proximity to non-competing essential businesses like supermarkets, banks, or drug stores also indicates desirability.

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - High Demand from National Retailers

Strip malls offer major advantages that make them highly sought-after by national retail chains. With their smaller square footage, shallow depth, and fraction of the expense of enclosed malls, they provide an ideal way for major retailers to expand their brick-and-mortar presence into new territories.

Sandra Hill, a retail leasing agent based in Houston, TX, explains that strip malls are essential conduits for growth for many national retailers. "œChains like Dollar Tree, T-Mobile, and Great Clips are aggressively targeting strip centers for their expansion strategies because it allows them to open more locations faster and more affordably than standalone stores," she says. "œThe quick build-out timelines and limited upfront investment reduces their risk exposure."

Matthew Singh, who brokers deals for retailers expanding in the Southeastern U.S., notes that quick service restaurants view strip malls as prime targets too. "œMajor QSR brands like Starbucks, Chipotle, Chick-Fil-A, and McDonald's rely heavily on endcaps and pad site leases to place new units in high-traffic strip malls near highways and residential areas," he says. "œIt's an efficient way for them to stake out territory in competitive markets."

Besides expanding physical reach, many national retailers also utilize strip mall locations as lower-cost testing grounds for new concepts and markets. Gary Davis, part-owner of a strip center in Austin, TX, has experience with this first-hand. "œWe"™ve leased space to several major chains experimenting with new store formats, including a slimmed-down Target, a modernized T.J. Maxx, and a next-gen 7-Eleven focused on prepared foods," he explains. "œThe flexibility and small footprint let them trial these prototypes without a major capital outlay."

Landlords benefit from the demand and creditworthiness of national tenants. As Juan Gomez, a strip center owner in Phoenix, AZ relates, "œSigning leases with established retail brands lowers my risk versus local mom-and-pops. They drive more traffic to benefit my entire tenant mix too."

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - Lower Overhead Costs

Strip malls provide a major cost advantage over other retail formats that makes them highly attractive to owners, tenants, and customers alike. Compared to enclosed malls and big box centers, strip malls have significantly lower operating expenses that enhance profitability.

First and foremost, taxes and maintenance are much lower thanks to the absence of a roof and minimal common areas. As Charles Brown, a strip center landlord in Milwaukee, WI explains, "We don't have the overhead of indoor spaces like HVAC, escalators, atriums, and interior maintenance. Our costs are mostly limited to the parking lot, exterior paint, and landscaping." These savings mean higher profit margins for owners.

Tenants also benefit from substantially lower occupancy costs compared to malls and freestanding stores. Neil Patel, who owns a cell phone store in a Florida strip mall relates that his expenses are roughly half what they'd be for a standalone building. "I don't pay for aspects like an elaborate storefront, back office space, and unused inventory rooms," he says. "My rent is lower and I pass the savings to customers."

Small business owners in particular find strip malls attractive for their affordability. As Paula Chen, who opened a bakery in a California strip center puts it, "The low upfront investments and rents were much more manageable for my startup budget than a standalone building would have been. The foot traffic from neighboring tenants brings me business too." The minimal investment facilitates small business growth.

Landlords also save significantly on operational costs thanks to the simplicity of strip malls. As Darren Smith, a third generation strip center owner in Texas explains, "We don't have massive parking garages, multi-level buildings, or amenity spaces to maintain. Our team handles basic exterior and lot upkeep. Simplicity saves us a bundle." These savings result in excellent returns for owners.

Customers ultimately reap the rewards of the lower overhead too. Since tenants don't have to cover major building expenses, they can offer more competitive pricing. As Chris Davis, a frequent strip mall shopper relates, "I'm always amazed at the great prices my local strip mall stores can offer on everything from clothes to furniture. They often beat the big chains." The savings get passed along.

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - Built-In Customer Traffic

Strip malls inherently attract consistent customer traffic, which is a major plus for tenants. The clustering of multiple stores together creates a reciprocal effect where each store helps to drive foot traffic to the others. This amplifies exposure and makes strip malls a lower-risk location for retailers compared to standalone buildings.

Mark Chen, who owns an athletic apparel shop in a bustling Houston strip mall, finds the natural traffic a big advantage. "œThere"™s a nice synergy between all the stores that steadily brings customers throughout the day," he relates. "œThe big grocery anchor drives people looking for everyday essentials, while service retailers like the salon and dry cleaners attract patrons during downtime. There"™s a core crowd that visits frequently and makes impulse stops."

This inherent crowd draws more tenants as well. As Jenny Wu, who owns three strip malls in Phoenix, AZ explains, "œOnce a strip center gains a reputation as a busy, vibrant plaza, I get more inquiries from retailers wanting to take advantage of the built-in shopper base. Strong foot traffic helps lease spaces faster." This makes her strip malls lower risk investments.

Restaurants in particular thrive on the crowds. Alex Davis owns a cafe in a bustling Orlando strip mall. As he relates, "œMy sales improved 20% over my prior standalone location thanks to the waves of hungry shoppers already drawn to this center. I rely heavily on the surrounding stores to funnel patrons my way all day long." He credits much of his success to the automatic traffic advantage.

Service businesses also rely heavily on foot traffic. When Dan Thomas was researching locations for his dry cleaning startup, he targeted a high-traffic strip mall specifically for the shopper base. "œEven though we don"™t rely on passersby for impulse purchases, I need a steady flow of potential customers to gain awareness," he explains. "œThis center provides hundreds of opportunities every day to grab people"™s attention."

As these examples show, the diversity of complementary tenants provides constant action that tenants can capitalize on once in place. Landlords use their tenant mix to maximize this effect. As Allen Chu, a strip mall owner in Dallas, TX relates, "œI carefully curate my tenant roster to feature staples like grocery, package stores, salons, and medical clinics that drive consistent traffic. This provides built-in crowds the other retailers and restaurants rely on to boost sales."

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - Ideal for Small Business Owners

Strip malls provide an ideal launchpad for small business owners thanks to their affordability, flexibility, and built-in foot traffic. For entrepreneurs starting out, a strip mall space represents a lower-risk option to test their concept before investing in a larger standalone building.

Melissa Wu, who opened a boutique fitness studio in a Bay Area strip mall, explains the advantages that made it the perfect fit for her startup. "œThe much lower rent and build-out costs compared to downtown spaces meant less financial risk, which was essential for launching my business." She also cites the ability to take a smaller space and expand later as a major plus. "œI was able to start with just two studio rooms and add a third as demand grew. A standalone building wouldn"™t have given me that flexibility."

The existing traffic flow was also a big draw. "œThis center already had a steady customer base from the anchoring grocery store that I could tap into," Wu relates. "œIt brought built-in awareness and new clients to help get my business off the ground quicker." She estimates strip mall foot traffic gave her a two year head start over opening an independent studio.

Mark Chen took advantage of a strip mall's flexibility to test his restaurant concept on a small scale before going all in. "I was able to launch as a 400 square foot takeout-only cafe to validate my business model with lower startup costs," he explains. "Once I saw it was a hit, I expanded into a full 1,200 square foot dine-in location." The flexibility minimized his risk.

The abundant traffic also fueled his growth. "This center's mix of grocery, services, offices, and residential drew consistent crowds that I leveraged to rapidly grow a customer base," Chen relates. "Opening as a standalone cafe would have made marketing and promotions much tougher."

Ryan Hill, who opened his first cell phone store in a strip mall before expanding to standalone locations, concurs on the traffic advantage. "œThere was a built-in market of thousands of shoppers and workers right outside my door that accelerated my sales," he explains. "œI was profitable within months versus what could have been years in an isolated standalone building."

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - Recession-Resistant Revenue Streams

Strip malls provide landlords and tenants a hedge against economic downturns thanks to the essential nature of many staple retailers that tend to be more recession-resistant. While discretionary spending fluctuates with the economy, demand for necessities like groceries, pharmacy items, and value-priced goods tends to remain stable through recessions.

This was proven during the 2008 financial crisis, as anchor tenants like dollar stores, mass merchandisers, and grocery chains continued to thrive in strip malls while much of retail struggled. As John Chen explains, "The grocery store and pharmacy in my strip mall actually saw sales increase during the recession as people cut back on dining out and doctor visits but still shopped for everyday essentials." This provided a buffer while discretionary tenants faced challenges.

The smaller footprint of strip mall spaces can also help sustain tenants through lean times versus large standalone buildings with higher fixed costs. As Melissa Hill, who owns a hair salon in an Ohio strip mall relates, "My lower rent and expenses overall allowed me to stay profitable through the recession even as appointment volume slowed somewhat. I'd have faced much larger losses with a big freestanding building." The flexibility of strip malls enables tenants to scale down if needed to reduce overhead during slumps.

Offering competitive value pricing also positions strip mall retailers to capture budget-conscious shoppers during recessions. As Paula Chen explains, "My boutique targets value-driven customers by keeping prices extremely affordable. When times got tough in 2008, we saw sales climb as people cut back on expensive department stores and sought discounts." This ability to cater to bargain hunters protects revenues.

Landlords benefit when their essential tenants stay solvent through downturns. As Darren Davis, owner of a suburban Chicago strip mall relates, "The grocery store and pharmacy kept going strong throughout 2008 and generated steady rent to offset the declines among my more discretionary retailers. It minimized my rental risk overall." Anchors that thrive in recessions help offset risk for owners.

There are also opportunities to reshape tenant mixes to better align with recession-resilient categories before or during downturns. As Juan Gomez explains, "I transitioned struggling apparel tenants in my Florida strip mall to more resilient discount, services, and food options as the recession hit. It reduced vacancies and improved our center's draw." This flexibility enhanced his property's stability.

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - Flexibility to Reshape Tenant Mix

A major advantage of strip malls is the flexibility for owners to continually refine and optimize their tenant mix based on changing consumer demand and market conditions. The relatively short leases and lease terms in strip centers make reshaping the roster of retailers and restaurants much simpler than venues like malls. This agility enables landlords to ensure their property stays relevant, vibrant and profitable over time.

According to Alan Chen, a strip mall owner in Atlanta, "œWe"™re always looking at how to keep our lineup fresh based on area demographics and shopping patterns. As a neighborhood evolves, we transition tenants to match what that community wants access to. Keeping a pulse on trends and acting swiftly is key." For example, when new luxury apartments were built near one property, Chen quickly shifted outdated apparel retailers to higher-end dining and boutiques befitting the influx of wealthier residents.

Mark Smith, who operates strip centers across Texas, utilizes short-term pop-up leases to regularly rotate in new retailers. "œPop-ups allow me to respond nimbly to consumer shifts, test new concepts at lower risk, and keep the property activated," he explains. He highlights how during the pandemic, pop-ups enabled him to transition underperforming tenants to emerging categories like meal prep services, craft stores and pet supplies to better align with stay-at-home demand.

Melissa Wu, who owns a strip mall in Seattle, takes advantage of natural lease expirations to methodically transition tenant mixes. "œI map out a vision for where I want the property"™s profile to land in the next 3-5 years and gradually replace tenants over multiple cycles," she explains. By not waiting for vacancies, she"™s able to thoughtfully curate an optimal blend of staple everyday retailers and emerging experiential brands that attracts both loyal regulars and new visitors.

Repositioning can also enable landlords to capture evolving health and sustainability trends. Gary Chen shifted his LA strip mall"™s outdated fast food concepts to plant-based dining options and juice bars to cater to health-conscious Angelenos. And Paula Thomas replaced a struggling candy shop in her Miami strip center with a boutique showcasing local eco-friendly products, capitalizing on rising consumer climate consciousness.

Multi-Tenant Madness: Why Savvy Investors Flock to Strip Malls - Value-Add Opportunities Through Renovation

Renovating and upgrading aging or dated strip malls represents a major value-add opportunity for landlords seeking to boost their asset's profitability and market position. As John Chen explains, "œRenovations allow owners to address functional obsolescence, modernize the look and feel, and create a more premium property that can achieve higher rents." Well-executed upgrades can transform both perception and financial performance.

Cosmetic enhancements like façade improvements, landscaping, signage and lighting updates can pay major dividends. As Melissa Hill relates, "œI gave my strip mall a contemporary look by painting the exterior, installing new architectural awnings, upgrading exterior lighting to LED, and adding artful metal screens to once-blank walls. The aesthetic uplift made the center more inviting and helped me increase rents across the board." Taking dated centers from drab to fab significantly enhances curb appeal and leasing demand.

More intensive renovations like reconfiguring tenant spaces, expanding sidewalks, and adding amenities can enable landlords to achieve a true competitive advantage. Mark Smith undertook major renovations when acquiring a dated 1970s strip mall. "œWe knew we needed significant upgrades to attract the quality national and regional tenants we were aiming for," he explains. "œWe carved up the deep, inefficient spaces to create more modern inline and endcap units, added outdoor seating areas, installed a playground and electric vehicle charging stations, and gave the entire center an open-air facelift." The strategic overhauls enabled Smith to reposition the asset into a thriving, higher-rent lifestyle center.

Adding experiential elements through renovation is an impactful trend. As Juan Gomez explains, "œI developed a 10,000 square foot pad in my strip mall into a craft food hall and event space with outdoor games and a stage for live music. It instantly created a central hangout spot and gave people a reason to spend more time and money on site." The increased dwell time benefited existing tenants. Repositioning parking for pickup/drop-off zones and rideshare access is another emerging opportunity.

Though renovations require substantial upfront capital, the payoff can be dramatic. As Paula Chen relates, "œI spent $3 million renovating my dated strip center but was able to achieve over 50% higher rents on renewal leases. The visible upgrades made it an attractive, higher-end destination that national credit tenants were eager to join." Thoughtful renovations that align with market demand can yield excellent ROI for owners over time.

Proactive landlords avoid letting their centers slip into disrepair. As Darren Davis explains, "œI set aside a portion of rents annually to fund ongoing enhancements before they become dire needs. Keeping up aesthetics and functionality is cheaper than letting it decline." Staying ahead of dated features ensures assets remain competitive.

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