Strip Malls Turn Heads

Between the economic downturn and the game-changing rise of online commerce, the bricks-and-mortar retail sector has taken some huge hits in recent years. But there’s a bright spot in the business of shopping that has been conveying significant benefits to commercial brokers: strip malls.

“There is still a strong need for strip centers,” says Rob Grossman, COO of the strategy & operations practice with Deloitte Consulting. Vacancy in strip and community centers fell by 30 basis points in 2012 and, at the beginning of 2013, sat at 12.8 percent nationwide, according to CRBE Econometric Advisors. Newer properties, particularly those located in high-density areas with strong employment, report even lower vacancy rates, says Julie Taylor, senior vice president of the Retail Services Group at Cornish & Carey Commercial Newmark Knight Frank in San Francisco.

Investors like strips, too. Almost 60 percent of respondents to the “Emerging Trends in Real Estate 2013” survey tagged community and strip centers a “buy.” Why? “Strip centers are in demand because they are easier to manage and lease than larger centers and the rate of return can be 8.5 to 9 percent, 50 to 100 basis points higher than for a community center,” says Mez Birdie, CPM, director of retail services for NAI Realvest in Orlando.

Five hot strip mall tenants

1. Frozen yogurt—the darling of the late ’80s returns
2. Locally made goods—the “locavore” food movement has expanded to include clothes and personal care items.
3. Furniture stores and home decor
4. Pressed juices—the new smoothie
5. Waxing and threading

Strips also fill a basic consumer need. “The traditional value proposition of community/neighborhood,which generally includes a grocery or drug store—or a smaller strip center anchored by a convenience store—hasn’t really changed. These properties still provide an easy way to access the products you need every day, [which] hasn’t really changed,” says Grossman. “Even in the age of online retailing, there are some items you don’t want to wait a day or two to get.”

At the same time, warns Grossman, simple convenience may not be enough to ensure success. “Today, centers need to merge convenience with destination and services that can’t be obtained through an online channel. A good location isn’t sufficient.”

Instead, smart shopping centers must create “that right third place after work and home where people want to congregate. It’s by far the best way to increase traffic to the entire center,” says Greg Carbone, CCIM, CPM, director of property operations for EDENS in Bethesda, Md. So how can owners and managers position their centers to capture the brass ring?

Get the Hottest and Strongest Tenants

“Choosing the right tenants is more important than getting the higher rent,” says Taylor. If you create a dynamic mix in which each tenant shines and complements one another, “you create an environment that generates more sales and traffic than each tenant alone. Ultimately, higher sales will generate higher rental rates,” she says.

Tenants, too, recognize the value of being in the right place with the right company. “Many tenants—even smaller ones—are willing to wait and even pay more for the right location,” says John Orr, CCIM, vice president of the retail group at Colliers International in Charleston, S.C. “Five or six years ago, those retailers would have felt compelled to open new stores in lesser centers.”

What makes a delectable retail mix? The short answer: food. In a smaller unanchored center, for example, “you only need one of the very popular, 2,500-square-foot restaurant concepts to anchor the property and create the increased traffic other tenants want,” says David Andrews, CCIM, a partner in the Richmond, Va., office of The Shopping Center Group. Top restaurant performers today are fast casual spots such as Pei Wei, Chipotle, and Panera Bread, which have posted a higher increase in sales than full-service casual dining chains over the last year, says Birdie. Even upscale supermarkets also embracing the destination strategy, by adding wine bars, eat-in restaurants, and even music, says Judy Hatfield, CCIM, a principal with Equity Commercial Realty in Norman, Okla.

What else keeps those customers coming back for more? The promise of beauty. Health and beauty retailers are one of the fastest growing retail categories today, says Taylor. Tenants like day spas, waxing, and massage keep shoppers around for several hours, especially baby boomers and others with more disposable income, Birdie adds.

A variation on the health theme is fitness centers. From Gold’s Gym to smaller cross-training centers and yoga studios that can fit into 2,500-square-foot inline spaces between the anchors at a community-oriented strip mall, fitness is a sure-fire draw, particularly for the under-35 demographic, says Andrews. “Other retailers used to dislike fitness because it took up so much parking, but now the same retailers realize those concepts keep shoppers coming back to the center,” he says.

Specialization within a strip mall is also “a very savvy way to merchandise a center and make it a destination,” notes Taylor. She recalls a top-performing center that had ballet, karate, crafts, a toy store, and day care. “Everything for the mom and the child is in one place,” Taylor says. Ethnically oriented specialty centers, which offer groceries, home decor, food, and even clothing for one large immigrant group, can turn an otherwise ordinary center into a local or even regional destination, says Grossman.

A variation on the specialization theme is a center with multigenerational activities. “You want to create an experience all three generations can share—where you drop off your child for a music lesson or an art class while you get a massage,” says Carbone.

In lower-income areas, a center with a discount or dollar store and a small grocery may become a destination for consumers who don’t have easy access to mainstream retailers for geographic or economic reasons, says Taylor.

Managers and leasing agents do need to exercise caution not to let the combination of retail and service tenants “turn a center into a hodgepodge,” says Birdie. Service tenants such as a church or library may harm the retail tenant mix at a strip center. Customers of these tenants also take up parking for extended periods, which is why many national retailers restrict certain service tenant uses near their stores.

Create a Sense of Vibrancy

Top-notch tenants can create a destination, but keeping a center vibrant requires creative marketing. Doing events that bring tenants to a center is pretty standard, but looking for a new twist can make your property memorable, says Carbone. For example: “Most restaurants offer some sort of two-for-one special at dinner on Valentine’s Day, but one of our restaurants that was hosting a Mom’s Club breakfast on Feb. 14 gave every customer a rose. That made a real connection because it was out of the ordinary.”

Loyalty programs and coupons distributed through social media and mail are another widely used retail promotional tool and are “a great way to invite customers into your center for the first time,” says Hatfield. Again, though, it’s finding a way to make the expected fresh. Hatfield encourages retailers to create monthly coupons, which she then personally gives as gifts to business associates, community leaders, and tenants in her other properties.

An emotional connection—whether it’s to an individual owner or a restaurant or store that’s a local institution—is another way to create a destination experience that can’t be replicated online, says Carbone. “In smaller stores, customers are often attracted by the personality and personal story of the owner.” “Shoppers, especially younger ones, will go and support a favorite store by buying a $300 pair of jeans made locally rather than buying three less expensive pairs online,” says Orr.

Keep Facilities Tip-Top

The final piece of turning just another retail strip into a destination is appearance. During the recent recession, some landlords were too cash-strapped to spend on upkeep. Now there is “more of a willingness among capital owners to fix up center exteriors and offer tenant improvement concessions that will create synergies and higher sales,” says Orr.

That’s good because “street appeal is absolutely key to making a center a destination,” says Andrews. “Cosmetic appearance is the No. 1 thing that consumers comment on, and it’s an easy one to fix,” he says. Painting and parking lot restriping should be done at least every other year. More extensive facade renovations are also necessary every seven to 10 years to keep a center looking current, he adds.

Why Destination Matters

At a time when consumers can shop anytime with a phone, tablet, or laptop, “landlords have to give consumers an experience that is more engaging than what they can find on the screen,” says Taylor. With the right combination of distinctive merchandise at the right price in a vibrant atmosphere, the result is retail success.