In a world dominated by Amazon and e-commerce, commercial real estate may not seem like a promising asset class for investors. But brick-and-mortar retail isn’t dead — and neither is commercial real estate as a portfolio staple. In fact, a notably old-school type of retail is getting some positive attention from investors — strip malls.
Troy Applegate, head of commercial mortgage lending and commercial banking at JP Morgan, noted in recent commentary that strip malls have been high performers throughout the COVID-19 pandemic. Strip malls remain a viable asset class for investors, either through the direct purchase of commercial properties or through real estate investment trusts (REITs).
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“There’s a misconception that the pandemic forced most retailers to close. Many stores did close, and only time will tell how retailers reliant on office workers and tourism will fare,” Applegate wrote. “But service-oriented strip mall retailers in densely populated urban and suburban neighborhoods performed well throughout 2020 and 2021. These properties have consistently performed well regardless of market conditions.”
How well have they performed? As of early September, shopping center REITs were up 48% for the year, according to the Hoya Capital Shopping Center REIT Index, which tracks 17 shopping center REITs.
What to Consider When Investing in Shopping Centers
Investors looking to add commercial properties to their portfolios should focus on buying properties in densely populated residential areas, Applegate wrote. Despite the proliferation of online shopping and e-commerce, shopping centers in suburban and urban neighborhoods remain vital components of their surrounding communities.
However, Applegate notes that real estate in city centers may face slower recoveries, especially in areas that are reliant on foot traffic from office workers and tourists. “The specific timeline is uncertain, but these retail locations are likely to recover as employees return to work and travel increases,” he wrote.
Next, Applewood recommends finding tenants that provide in-person services like hair and nail salons, or fast-casual dining. It’s these businesses, which offer services that cannot be purchased online, that have fared well through the pandemic.
Lastly, the JP Morgan executive recommends commercial real estate investors keep their properties generic and limit the upgrades they make to them. As a result, your space will appeal to a wider range of potential tenants and businesses.
Investing in Shopping Centers With REITs
The problem with investing in shopping centers and other commercial properties is the high barrier to entry that exists. It takes a lot of capital to acquire and maintain a strip mall. However, investors hoping to add shopping centers to their portfolio can do so indirectly by investing in a REIT.
REITs are companies that either own income-producing properties or own the mortgage on properties. These entities sell shares to investors, which can be purchased directly from the company or through a pooled investment vehicle, like a mutual fund or exchange-traded fund. REITs typically focus on specific types of real estate, including residential properties, health care facilities or commercial real estate. The Hoya Capital Shopping Center REIT Index tracks the following companies that invest in shopping centers:
- Kimco Realty (KIM)
- Regency Centers (REG)
- Federal Realty (FRT)
- Brixmor Property (BRX)
- SITE Centers (SITC)
- Phillips Edison (PECO)
- Retail Properties of America (RPAI)
- Urban Edge (UE)
- Retail Opportunity (ROIC)
- Acadia Realty (AKR)
- Kite Realty Group (KRG)
- Saul Centers (BFS)
- RPT Realty (RPT)
- Urstadt Biddle (UBA)
- Retail Value (RVI)
- Whitestone REIT (WSR)
- Cedar Realty (CDR)
Bottom Line
Despite the pandemic’s negative impact on many segments of the commercial real estate industry, shopping centers remain a promising asset class, according to JP Morgan’s Troy Applegate. For investors hoping to purchase a strip mall or similar property, Applegate recommends focusing your search on densely populated urban or suburban areas. Finding tenants who provide either in-person services that cannot be offered online or fast-casual dining is also a key to success. Buying shares in a real estate investment trusts (REITs) is another viable way to invest in shopping centers, which have performed well during the pandemic.
Real Estate Investing Tips
- Whether you’re looking to purchase a multi-family property or a shopping center, real estate investors should set aside a percentage of the rents they collect every month to cover maintenance, make repair or pay for property management. By allotting a portion of every rent payments for these purposes, landlords will avoid dipping into their personal savings to cover the inevitable expenses.
- A financial advisor can help you integrate real estate and other alternative investments into your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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