Strip Mall Vacancy Rates Lowest Since 2003

Consumers’ preference for more convenient shopping options and those that can’t be easily replicated online is likely to rise, according to a new report from Marcus & Millichap.

Unanchored strip centers are delivering on that demand today – a trend that is likely to continue.

These shopping areas are “in a position of strength amid a period of household budget tightening,” according to the report. Part of the attraction is that they are typically located closer to consumers than larger centers and feature a diverse mix of tenants, said Marcus & Millichap.

The firm reported that during the past three years, demand in the subsector more than quadrupled new space delivery, compressing vacancy to 4.7 percent — the lowest recording since 2003.

An average of 10,000 new leases were executed annually for 1,000- to 5,000-square-foot spaces at strip centers during this same period.

Higher gas prices and ongoing hybrid work schedules are other reasons consumers will prefer unanchored strip centers.

Recent consumer spending trends that showed rising spending across the restaurants and bars, electronics and appliance, and apparel categories are another plus for the sector.

“Should this momentum continue, competition for strip center space should remain robust, with most retailers required to comb existing properties amid a pullback in development,” according to the report.

New delivery in this space hasn’t been lower since 2000, Marcus & Millichap reported.

As of March, the active national construction pipeline comprised less than 1 million square feet, with half of this space located in Texas and Florida.

Among the retailers leaving mall space in favor of unanchored strip malls are Bath & Body Works and Foot Locker.

Marcus & Millichap said the property type is also becoming more attractive to certain institutions, REITs, and investment funds with a handful having recently sold their larger shopping center holdings or recapitalized a sizable portfolio with plans to reinvest funds into collections of strip centers.

Imminent interest rate cuts are expected to lead regional/local banks to actively finance unanchored strip center acquisitions.

Marcus & Millichap sees lending rates from these sources likely to start at 6.5 percent, with leverage ranging from 50 percent to a maximum of 65 percent. It added that some investors might instead execute all cash transactions, potentially with proceeds from 1031 exchanges, the report said.