Retail property

Retail property ranges from neighborhood strip centers and single-tenant stores (a drugstore or fast-food pad) to larger ‘power centers’ with big boxes, and enclosed malls. The owner earns rent from businesses, usually on long leases where tenants also pay a share of taxes, insurance and upkeep.

The big risk is losing a tenant, especially an anchor (a grocery store or big box that draws shoppers). When a national chain goes bankrupt, the owner can be left with an empty building and no rent, and smaller tenants may leave too. Re-leasing can take months or years, and it often costs money for remodeling and broker commissions.

Since about 2022, neighborhood centers with grocery stores and service businesses (restaurants, salons, gyms, medical) have done well, because little new retail space was built. Large downtown malls that depend on tourists and office workers have struggled, especially in San Francisco.

Who it suits

Owners who want long leases where tenants pay many property costs, and who can afford some vacancy between tenants.
Buyers of neighborhood centers with daily-needs tenants (grocery, pharmacy, food, services) in growing areas.
Investors with leasing experience or a good local broker, who can find a new tenant when a chain leaves.
Local business owners who buy the small building their own shop uses.

Who it doesn’t

Anyone whose whole income depends on one tenant, especially a weak chain.
Buyers without reserves for tenant improvements and leasing commissions when a space goes dark.
Investors who can’t judge local shopping traffic, safety and access (parking, visibility, turn lanes).
People drawn to a very large mall or downtown property by a low price alone. The San Francisco Centre lost most of its value and tenants.

Real stories

A downtown mall handed back to the lender (2023)

Nordstrom and other stores left. Sales at the Westfield San Francisco Centre fell from $455 million in 2019 to $298 million in 2022, and foot traffic dropped 43%. The owners stopped paying a $558 million mortgage and turned the mall over to a court-appointed receiver. In 2024 the lenders moved to sell it at a foreclosure auction. By then the debt had grown to about $625.6 million.

Lesson: A big retail property depends on its anchors and on people visiting the area. When both leave, even large, experienced owners can lose it. Fortune (Bloomberg): San Francisco mall owner defaults as real estate woes rise (June 12, 2023)

Drugstore shells sit empty after a chain’s bankruptcy (2024)

Rite Aid closed at least 73 stores in the Philadelphia region from 2022 to late 2024 as it went through bankruptcy. Some buildings, like one in West Philadelphia, sat empty for years. A CBRE broker said the shells are often in good shape, but many tenants find them the wrong size. Grocers, dollar stores, medical offices and car washes have filled some.

Lesson: Before buying a single-tenant store, ask who else could use the building if that tenant leaves. Budget for a long gap. Philadelphia Inquirer: Vacant Rite Aid stores and what replaces them (Dec. 16, 2024)

Empty Bed Bath & Beyond boxes re-leased at higher rents (2023)

Bed Bath & Beyond closed all its stores in 2023. Chains like Burlington, HomeGoods and Michaels moved quickly into the empty spaces, including several in the Phoenix area. Kimco Realty, which had 26 former Bed Bath leases, said its new leases were 38% higher than the old rents. Little new retail space had been built since 2008, so good boxes were scarce.

Lesson: Well-located centers in busy suburbs can recover fast from losing a tenant, especially when little new space is being built. ABC15 Arizona: Bed Bath & Beyond stores won’t be empty for long, here’s who’s moving in (Nov. 28, 2023)

Grocery-anchored strip centers come back into favor (2024)

Blackstone paid $4 billion for Retail Opportunity Investments, which owns about 90 shopping centers, most anchored by grocery stores. Another investment firm, Cohen & Steers, bought a fully leased outdoor shopping center in San Mateo, California, for $127 million. Investors pointed to little new construction and steady visits to grocery stores and services.

Lesson: Neighborhood centers built around daily needs (groceries, food, services) have held up better than malls. The lesson is about tenant mix, not size. Business Insider (via AOL): The lowly neighborhood strip mall might be the hottest new thing in commercial real estate (Jan. 5, 2025)

Costs

Vacancy: a closed drugstore shell is often 8,000 to 16,000 square feet and can sit empty for years (Philadelphia Inquirer).
Re-leasing: tenant improvement money, free rent and broker commissions to land a new tenant. Some owners split a big box into smaller spaces.
Common-area costs (parking lot, lighting, landscaping, security). Under triple-net leases these mostly pass to tenants, but the owner pays them when spaces are empty.
Property taxes and insurance. In California, a purchase triggers reassessment to market value (Board of Equalization).
Loan payments that continue whether or not tenants pay.

How people pay

Banks and credit unions make commercial loans based on the center’s income and tenant quality. Leases with strong national tenants are easier to finance.
A small business that uses at least 51% of an existing building (60% if newly built) may qualify for an SBA 504 loan to buy it. These are long-term, fixed-rate loans, with a maximum 504 loan of $5.5 million.
Large malls are often financed with big securitized loans. When income drops, owners may stop paying and hand the property to the lender. That happened with the San Francisco Centre in 2023.

Check before you buy

Read every lease: rent, length, renewal options, and who pays what (triple-net or not). Look for any ‘co-tenancy’ clause that lets tenants cut rent or leave if the anchor closes.
Check the financial health of the main tenants (bankruptcy news, store-closing lists).
Look at traffic, parking, visibility and nearby competition. Visit at different times of day.
Estimate what it would cost and how long it would take to re-lease the largest space.
Confirm zoning allows likely replacement uses (medical, gym, grocery, restaurant).
Get an environmental report if the site had a dry cleaner or gas station.