A significant portion of the commercial real estate market has struggled following the COVID-19 pandemic — the office sector in particular as the remote and hybrid work trends have decreased demand. Meanwhile, e-commerce’s ongoing rise has forced a number of retail spaces to transform into experiential and mixed-use developments to maintain their relevance.
While these parts of the CRE industry struggle, necessity-based CRE has managed to thrive, Benzinga reports. These properties are vital for everyday living — grocery stores, multi-family housing and healthcare facilities for example. Since people always need these types of facilities, they remain in demand, regardless of how the rest of the market is performing.
Necessity-based CRE’s ability to excel, even as the rest of the industry struggles, makes it attractive to investors. The consistent demand for such stores and facilities helps keep their investment safe from big market swings. Adding these types of properties to their investment strategy allows CRE investors to diversify their portfolio safely.
Why necessity-based properties are succeeding
Socio-economic conditions have played a role in necessity-based properties’ success, Benzinga reports. Additionally, strip malls have proven to be strong CRE investment, according to The Wall Street Journal. Leased occupancy reached 95.3 percent during the first quarter of 2023 — the highest level in eight years, according to real estate advisory firm Green Street. Meanwhile, physical occupancy stayed near its pre-pandemic level of 92.4 percent, due to landlords signing leases faster than retailers could move in.
Landlords haven’t had to split large anchor spaces (larger than 10,000 square feet) to find tenants — another sign this market is strong, The Wall Street Journal reports. This practice happened more often in 2017 and 2018, but more big-box spaces have had more luck securing single tenants, according to Paulina Rojas Schmidt, who leads Green Street’s strip center team.
Meanwhile, releasing spreads, the difference between the prior tenant’s rent and what the incoming tenant will pay, has continued to go up after a major decrease in 2020. Strip center REIT foot traffic has fallen just 8 percent from 2019 as of mid-May, compared to the 18 percent dip at mall owner Simon Property Group, per Placer.ai and Green Street.
The flexible working trend has helped strip malls grow because customers are spending more time at home vs. the city centers where their offices are located. Plus, as more than 2 million people have moved from big cities to the suburbs, strip centers have become even more in demand. The number of retail establishments in city centers has fallen 3.8 percent since the fourth quarter of 2021 compared to the same timeframe in 2019. Meanwhile, the amount of retail establishments in the inner suburbs has increased almost 1 percent. Prior the COVID-19 pandemic, city centers experienced the most growth in retail stores.
Office occupancy remains at half of pre-COVID levels and more workday lunches are taking place at strip mall restaurants that are closer to workers’ homes. Additionally, personal care services that typically exist in strip retail centers like massage, dental care, chiropractic and medical laboratories have seen consistent demand in recent years.
“I’m surprised by the breadth of retailers that are exploring strip centers,” said John Worth, executive vice president of research and investor outreach at the National Association of REITs.
