Guide to Buying Shopping Centers for Sale
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
COVID-19 and the rise of e-commerce originally led everyone to believe that the days of in-person shopping were numbered. Surprisingly, however, the number of in-person storegoers has been increasing in recent months.
Over 75% of consumers report they feel comfortable going to a shopping mall, compared to just 30% in 2021. Shoppers are also spending more online and in-store, heightening demand for shopping centers.
Buying shopping centers for sale can provide investors with an excellent source of passive income through retail leases. Leasing out your shopping center's retail space will help to meet economic demand and generate a tidy chunk of monthly income.
To help guide investors looking to buy shopping centers for sale, we've put together this quick guide on doing just that. We'll discuss the shopping center business and property characteristics to keep an eye out for when buying commercial retail space to lease.
Let's get started.
What Counts as a Shopping Center?
A shopping center is basically any collection of commercial properties that are built for retail sales. Shopping centers can all be in a single building or structure, like a strip mall, or separate buildings in the same general space, like a retail power center.
The key feature of a shopping center is that the same entity manages the various retail properties. Shopping centers contain retail stores but can also have restaurants, banks, offices, recreation activities, and other businesses.
How Do Shopping Centers Make Money?
Shopping centers make the majority of their money through leasing their retail space to commercial tenants and collecting rental income. Tenants are responsible for paying rent and, depending on the specifics of the lease, common area maintenance and upkeep.
According to Statista data, average commercial retail rents in the US were $22.95 per square foot per year as of 2023. Assuming a small strip mall building with 20,000 square feet of rentable space, that comes out to over $450,000 in rental income annually.
Shopping center revenue ecosystems are typically based on the presence of larger "anchor" clients that draw the majority of customer traffic. Smaller tenants then benefit from the customer traffic that the larger stores bring. This retail structure is one reason why many retail tenants include co-tenancy agreements in leases.
Financing a Shopping Center Purchase
Investment properties are usually not eligible for SBA loans, so you'll most likely have to rely on a bank loan or other private loan to finance a shopping center for sale. Several lenders specialize in lending for shopping centers and offer different types of loans depending on the type of shopping center you're looking to buy.
Shopping center loans vary in rates, but most commercial lenders can provide up to at least 60% loan-to-value. Properties with better financial metrics and retail performance histories might receive higher loan-to-value ratios.
For example, a large retail center with notable anchor tenants, good historical performance, and profitable tenants could potentially get up to 80% loan-to-value.
Lenders also consider your shopping center's existing tenants as well as your intended tenants, and they see certain tenants as less risky than others. For instance, retail lenders prefer shopping centers that are anchored by grocery and food sales tenants because those industries tend to be more resistant to declines in consumer spending.
What Are the Qualities of a Good Shopping Center?
Below are some of the most important features to consider when buying shopping centers for sale.
#1 – Walkability
The idea of a shopping center is that customers will visit multiple businesses in the same trip, so a walkable design ensures they can easily access all the stores.
The physical design of a shopping center should "funnel" customers from one store to the next. There also needs to be sufficient space between walkable sections and roads to reduce danger.
#2 – Parking
Given that most Americans drive, there needs to be enough parking space to meet demand. Parking needs to be accessible and secure to prevent car theft and break-ins.
Shopping centers further away from urban areas and public transit might be more affordable but will, in turn, require more parking to accommodate customers.
#3 – Architecture
Shopping centers tend to have a more- or less-uniform architectural style. That doesn't necessarily mean that all the storefronts look the same—only that the visual and architectural style of the center should form a cohesive whole.
Aside from general aesthetic concerns, the architectural style also makes the shopping center stand out. Many people are drawn to local shopping centers thanks to their charm and visual appeal, like shopping centers near historical districts.
#4 – Nearby Competitors
When you're in the market for a shopping center for sale, you should have some idea of the kinds of tenants you'll want to lease your space to.
Researching the surrounding competition will help you make a smarter commercial real estate decision. For instance, if you plan to lease to clothing retailers, a property that's close to a large clothing retailer might not be the best idea.
No matter where you're looking for shopping centers to buy, your investment team should include a commercial real estate broker. Aside from general advice when buying properties, brokers can find potential shopping center investments, negotiate sales contracts, and even help you find retail tenants.
Are Shopping Centers a Good Investment?
Yes, shopping centers can be a great investment. They provide a highly regular source of income, especially if you lease your space to anchor tenants in industries that are more resistant to economic recessions, such as food, consumer staples, and discount retail stores.
The good thing about a shopping center is that, unlike other types of special-purpose real estate, you can easily modify the interior to fit your tenants' needs. The flexibility of retail space means you can draw a wider range of tenants to balance out the retail ecosystem.
Additionally, retail centers themselves make excellent real estate assets. The value of a shopping center depends on the quality and performance of its current tenants.
A properly managed shopping center can significantly appreciate in value and sell for a large profit. As long as you do your due diligence and find high-quality tenants, you can secure a reliable source of rental income.
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